Can My Monthly Payment Change?

By JJ Singh
Loan Page Columnist

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Your dream of owning a home is now more reachable than ever before. But beware - low interest rates now could mean rising payments later.


Mortgage Interest Rates

More and more, homeowners are opting for adjustable rate mortgages (ARMs) instead of traditional fixed rate loans. ARMs lock you into a low fixed rate for the first few years, after which your rate would fluctuate with the market. By underpaying in the beginning of your new home loan, you can afford a more expensive home; as your salary increases, you should be able to cover the higher payment later.

How Much Could My Payment Go Up?

The amount that your monthly payment could increase is not predetermined. In general, ARM mortgage interest rates are tied to an index rate and some percentage mark-up. This index rate is often a refection of the overall movement of interest rates. In contrast, the percentage mark-up, or margin, is a fixed number added to that rate. For example:

Index rate (7%) + Margin (2%) = Your ARM rate (9%).

How Can I Protect Myself?

The best way to protect yourself is by knowing the terms of your new home loan. Do you have an interest rate or payment cap in case something drastic occurs in the market? Are you protected against negative amortization or pre-payment penalties?

Even if you have a fixed-rate mortgage, you're not immune to payment fluctuations. Because of changing property taxes and insurance prices, your payment could also be subject to change.

It might seem easy to be blindsided by hidden terms, but by asking insightful questions to protect yourself, you can join the millions who achieved their dream of owning a home.


Handbook on Adjustable Rate Mortgages

About the Author

JJ Singh is a loan consultant who has mortgaged his life away to the micro finance industry in New York City. He holds a bachelor's degree in Economics from the University of Virginia.

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