Shock and dismay are quickly followed by anger as a homeowner reads the official-looking letter from the mortgage company instructing him to make a higher payment. Did somebody lie to him? Did he somehow sign up for an Adjustable Rate Mortgage when he thought he was getting a Fixed Rate? There must be a mistake, right?
No, nobody lied. Here’s what has happened.
On the day a homeowner signs loan documents for the purchase of his or her new home, a payment is presented. The majority of mortgage loans that are set up in the U.S. include money for Property Taxes on the home and Hazard Insurance for the dwelling. These are called PITI payments. PITI simply means Principle, Interest, Taxes and Insurance. Each month, the portion of the payment for taxes and insurance, is set aside by the mortgage lender in an Escrow Account. This money (in theory) adds up each month until it is time for the property taxes to be paid, or the insurance premium to be renewed. At those times, the mortgage lender sends the correct amount of money to either the County for property taxes or to the Insurance Company. The escrow account is depleted to pay these expenses and the process begins all over again for the new year.
The great thing about a PITI payment is the fact that the homeowner never has to be concerned with budgeting for the annual Property Tax liability or the Insurance Premium renewals. It is both a convenience for the borrower and a safeguard for the mortgage company. The mortgage company does not need to worry about a foreclosure due to unpaid Property Taxes or a house that burned down because of unpaid Homeowners Insurance.
The unnerving thing about a PITI payment is the letter in the mail stating the mortgage payment is going up. The payment must increase from time to time to cover the increasing cost of Property Taxes and Homeowners Insurance. Just like eveything else from gasoline to lumber, Taxes and Insurance prices are subject to change. And, they will change.
Experience borrowers are not surprised to receive this notification. They have seen it before. New homeowners though, are often very upset to receive this type of letter. If you have received a letter like this, read it carefully first. You will probably find the payment is rising for the reasons above. If the letter is difficult to understand (many are), call your Loan Officer first. That is what he/she is there for. Information about your mortgage is available to you after you move in! If you Loan Officer notices something unusual about the letter, he/she will let you know and can guide you to the person or organization to sort out the problem.
But remember, when the Property Taxes and the Homeowners Insurance Premium rise, the mortgage payment will have to follow. The mortgage company must collect enough money to pay these bills for you next year. The Fixed Rate mortgage that you signed up for is only guarantying that the Interest Rate will not change. The mortgage company cannot control expenses like Property Taxes and Insurance Premiums.
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