You’re finally in your new home. All is right in the world, and all you have to do is make your payment for the next 30 years, and it’s yours, all yours.
But what if that payment changes? You just got a mortgage statement, and your mortgage is going… up? We get this call from a lot of homeowners wondering what the heck happened and why their mortgage is going up.
Mortgage payments can fluctuate due to a few factors. Let’s look at some reasons why your mortgage would go up and how to better prepare for any future changes to your payments,
Why Did My Mortgage Payment Go Up?
First, a higher payment doesn’t necessarily mean you’ve done anything wrong, and it doesn’t mean that your lender made a mistake either (though sometimes that can happen). Mortgage payments will fluctuate over time. Some of the most common reasons you’ll see increases are changes to your escrow account, property taxes, homeowners insurance, or interest rate.
1. Escrow Account
Your escrow account makes up a portion of your monthly payment. You have your principal and interest payment, and then a monthly allotment is held to pay your annual home insurance policy and your yearly taxes for your home. Mortgage lenders often require their borrowers to add an escrow to ensure the borrower does not forget to pay their tax bill or insurance premium.
The money is collected monthly until the escrow payments are due – usually annually or semiannually. As a result, the monthly mortgage payment can increase to add the funds needed to keep the escrow account full enough to cover the insurance and tax bills.
Every year, after the taxes and insurance are paid, your lender performs an escrow analysis to see if the amount you’re putting in each month will be enough to cover the bills next time. If your escrow account comes up short, an increase in your mortgage payment amount might occur to cover the expected shortage. Your lender will send a letter advising you about the change in payment.
2. Property Taxes
Every year your property taxes can increase, which will result in your payment going up as well. If there’s a shortage in your escrow account because of a tax increase, your lender will give you two options. Pay a lump sum of the shortage amount or break the shortage amount into 12 payments that are added to your monthly mortgage payment. For example, if you’re $180 short, you could either pay the lender one payment of $180 or add roughly $15 to your monthly payment.
As discussed before, when your escrow analysis is performed, your monthly payment may cover the increased tax payment going forward to prevent the same thing from happening every year ideally. It can be tricky since your mortgage servicer only does an escrow analysis once a year, and it doesn’t always line up with when your property taxes are determined. An escrow analysis is an estimate of what your taxes will be the following year; unfortunately, your servicer has no control over the taxes you’re charged.
The two major reasons your property tax might go up are a reassessment or an exemption. A reassessment means the local municipality will reestimate the value of your home. If the value goes up, so do the taxes. Tax exemptions are placed on your taxes, so you don’t have to pay specific items. When those items are removed, your taxes go up.
3. Homeowners Insurance
Homeowners’ insurance is vital in a disaster that can harm or even destroy your house. Lenders require buyers to carry homeowners insurance to protect the home and the lender’s investment. The lender is the owner of your home until you have paid it off, so they want to protect their investment.
A few things that can change the amount you pay for your homeowner’s insurance include:
- Changing insurance providers
- Adding or removing coverage
- Making renovations to your home changes the value of the home and the insurance needed to fix it.
4. Interest Rate
This is only a concern if you have an adjustable-rate mortgage (ARM); these loan terms typically have a fixed rate for a specific period, and then after that, usually on an annual basis, the rate is adjusted to the current market value. Once an ARM’s payment amount changes, it can increase your monthly interest payment.
Some factors that can affect how this rate is determined include:
- Growing inflation
- A change in the federal funds rate
- Increasing sales of mortgage-backed securities (MBS)
How Can I Lower My Monthly Mortgage Payment?
What goes up can also come down. This means all of the factors mentioned can also decrease, lowering your mortgage payment. Let’s look at a few things that could also lower your payment.
If you have a conventional loan, put less than 20% down on a home. Your lender will require you to take out a private mortgage insurance (PMI). Once you have 20% equity in your home, the mortgage servicer can remove the PMI. Removing PMI will help lower the monthly payment.
If you have an FHA loan, it will typically have what is called mortgage insurance premiums (MIP). This is harder to remove than PMI. FHA loans require smaller down payments than conventional loans but have more restrictions. If you put down more than 10% on an FHA loan, mortgage insurance is removed after 11 years. If you put down less than 10%, you’ll have to pay mortgage insurance for the life of the loan. The only escape from that would be refinancing into another type of loan that does not carry Mortgage Insurance.
Another option that can lower monthly payment is by refinancing. Here are some benefits that refinancing can offer a mortgagee.
- Getting a lower mortgage rate: If interest rates drop, you can take advantage of the change by refinancing into a lower rate.
- Changing to a longer-term: Switching to a longer loan term will also reduce monthly payments, although it will take longer to pay off your mortgage.
- Switching to a different type of mortgage: Changing an ARM to a fixed-rate mortgage or an FHA loan to a conventional one can lower your monthly payment.
With constant changes every year on your loan, it can be confusing or even frustrating to see payments go up. If you need help understanding your existing payment or want to look at options for your home loan, chat with one of our experts today.