One of the things you’ll certainly hear when you’re trying to decide whether to stop renting and buy a house is that buying a house protects your housing payment from future increases. By buying property, you’re locking in a payment, and you can just sit tight and watch while rents around you increase.
Depending on the kind of mortgage you get, that’s true — to a point. If you opt for a fixed-rate loan, at least part of your payment — the sum of principal and interest — remains the same for the life of the mortgage.
But rarely is your house payment just made up of your mortgage’s principal and interest payments. Most likely, your monthly payment is made up of several parts, and some of those are subject to fluctuation.
So let’s look at the parts of your mortgage payment:
Principal: Think of principal as the amount you borrowed or the amount you still have left to pay on your loan.
Interest: Just like any other loan, your payments include interest at the rate you agreed to in the mortgage contract.
Your principal and interest amounts will change as you pay down your loan, but the total of principal plus interest will not change. The amount of principal you pay each month will increase, and the amount of interest you pay will decrease, but from month to month, the sum of principal plus interest will remain the same for a fixed-rate mortgage.
Taxes: The locality in which you live will collect taxes on your property each year (or twice a year in some areas) based on the assessed value of your home. You can pay this directly and bypass the mortgage company, but most homeowners opt to put the taxes in escrow because it helps them budget the expenses more predictably. Escrow is an account that holds the monthly tax payments you make. When the bill comes due, the mortgage company pays the taxes on your behalf from the escrow account.
Insurance: At the least, you’ll be required to hold homeowners (also called hazard) insurance. If your down payment is less than 20 percent of the amount you borrowed, you’ll also likely be required to carry private mortgage insurance. If you live in a flood-prone area, you might be required to buy flood insurance. All those insurance payments will go into your escrow account. When the premiums are due, the mortgage company will pay them on your behalf from the escrow account.
If your mortgage payment is going up (or down), where are you going to look to find out why? Check out the expenses being handled by escrow. Has an insurance premium increased? Maybe your real estate taxes?
So does buying a house really protect you from an increase in your monthly payment? Well, sort of. You might very well see an occasional small change. But buying a house protects you from large, arbitrary fluctuations in your housing payment from month to month, making it a whole lot easier to plan and stick to a household budget.
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