By Amanda Rebmann
You’ve closed on your new home using the VA mortgage. Congratulations! The 30-year, fixed-rate mortgage is an affordable product for military families. Since the rate is fixed, your payment is always going to be the same, right?
Not quite.
While it’s true that your principal and interest (P&I) payment will remain the same, the amount your lender collects for your taxes and insurance may increase or decrease on a yearly basis. And that can change the amount of your monthly payment.
The calculation your lender uses is based on the amount they paid for your taxes and insurance over the course of the year. For the most part, increases shouldn’t be too painful; a slight increase in taxes or insurance won’t alter your payment too severely. However, if you purchased a house in a rapidly appreciating neighborhood, you run the risk of a re-assessment dramatically increasing your taxes, which will eventually result in a higher mortgage payment.
VA Loans, like most other loans that carry a low down payment, will require your lender escrow for your taxes and insurance. It’s an extra layer of security for the lender to protect against default. If they maintain control over paying of taxes and insurance, it eliminates the risk of the house going to tax sale, or insurance lapsing.
By law, once a year, your lender must analyze your escrow account to make sure they are holding an appropriate amount of your money. If they are holding too little, your payment will increase. If they are holding too much, they will refund the overage back to you. First they look to see how much they paid out over the previous year, divide that number by 12, and that is your new deposit amount.
The next step is verifying if they have too much or too little in your account. They determine when during the year, your escrow account will reach its lowest balance. This usually occurs after a large tax bill is paid out, or several items are paid out at once. At this “low point,” most states allow the lender to maintain a two-month deposit “cushion.” So, if your monthly escrow deposit is $250, your lender is allowed to have up to $500 at this point. Anything over that amount is an “overage” and they are required to refund it back to you. Anything under that amount, a “shortage,” your lender will divide by 12 and add to your escrow payment.
Although rare, increases can be dramatic and may put a strain on your ability to pay. In these cases, you can request your lender spread your shortage over a longer period of time, instead of 12 months, perhaps 24. Although there is nothing they can do about your regular monthly deposit, spreading the shortage over a longer period of time may help you recover in the short term.
The bottom line is to account for escrow increases when deciding how expensive a home to buy. The sad truth is taxes are far more likely to go up then down, so you should consider purchasing a home in a slowly rising mortgage payment as the years go on into your financial planning.
