Can My Monthly Mortgage Payment Change?

by Meiling Hunter
CMR Columnist

Although home prices are falling, this wasn't the case not too long ago. In order to gain homeownership in the midst of increasing home prices, you may have taken an interest-only mortgage (I-O mortgage) or an adjustable-rate mortgage (ARM) with the option to make minimum monthly payments (a payment-option ARM). If your interest-only period ends or your ARM adjusts, you could face increased mortgage payments or negative amortization.

How much can my interest-only mortgage payment increase?

With an I-O mortgage, you pay only the interest on your mortgage during your interest-only period. Typically, the interest-only period lasts between 3 and 10 years. After the I-O period expires, your monthly payments will increase--even if current mortgage rates remain unchanged--because you now have to pay back the principal in addition to the interest. If your I-O period's expiration is nearing, use a mortgage calculator to determine if you can afford the increased payments.

What's wrong with making minimum monthly mortgage payments?

If you have three mortgage payment options each month on your monthly statement or payment coupons, you most likely have a payment-option ARM. With a payment-option ARM, your payment options are:
  • Traditional payment of principal and interest. These payments are made on a set loan term of 15, 30, or 40 years.
  • Interest-only payment. As mentioned above, you only pay the interest on the current balance and pay nothing down on the principal.
  • Minimum or limited payment. With this option, whatever interest you don't pay is added to the principal of the loan, increasing the overall amount you owe and the interest you will pay.
While it's always nice to have options, a payment-option ARM can be dangerous. Each time you choose to make the minimum payment, you will experience negative amortization--owing more than you originally borrowed. Payment-option ARMs have a built-in recalculation period, usually every 5 years. During this recalculation period, your loan payments are recalculated based upon your remaining balance and current market rates. If your loan balance is more than the original amount borrowed, or if interest rates have risen, your new payments can increase, sometimes by several hundred dollars.

Should I consider refinancing?

If you are thinking about refinancing out of your existing I-O mortgage or payment-option ARM, you need to determine what kind of mortgage payment you can afford by checking current mortgage rates and using a mortgage calculator. Compare current mortgage rates among several lenders and ask them to explain their loan programs in detail. Look for a mortgage refinancing that locks in mortgage payments you can afford.

Sources: About the Author
Meiling Hunter has worked in the mortgage industry for four years. She graduated from the University of California, Davis, with a double major in Economics and Philosophy.

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