Why Did My Mortgage Increase? Key Factors That Can Change Your Mortgage Payment

Once you move into your new home and start paying your mortgage, it becomes one of life’s many monthly tasks. The same amount comes out of your checking at the beginning of each month like clockwork as you pay down your mortgage and build home equity.

But what if that clockwork gets gummed up with some changes? What if that usually consistent mortgage amount suddenly increases?

There are several possible causes of mortgage payment changes.

To better prepare for any future increases to your payments, and to learn about strategies for bringing those payments back down, consider researching some of the common reasons listed below.

Why Did My Mortgage Payment Go Up?

A higher monthly mortgage payment doesn't necessarily mean you’ve done anything wrong. Mortgage payments can change even when the homeowner pays on time. Changes in your escrow account, property taxes, homeowners insurance or interest rate can increase the dollar amount of your mortgage loan payment.

1. Escrow Account

An escrow account is a legal arrangement in which a third party temporarily holds money or property until a particular condition has been met. Mortgage lenders often require their borrowers to add an escrow to hold funds for property taxes and home insurance payments. This is to ensure that the borrower does not forget to pay their tax bill or insurance premium.

The money is simply taken from the account as an escrow payment when the bills are due – usually annually or semiannually. As a result, your house payment may go up 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 tell you ahead of time that your payment has changed due to an escrow analysis.

2. Property Taxes

Your property taxes can increase while you own your home for a number of different reasons. The two major reasons your property tax might go up are a reassessment or an exemption.

●      Reassessment means the local municipality decided to assess the value of your home. If the property value goes up, so do the taxes.

●      Property tax exemptions make you legally entitled to pay lower taxes, but they can go away. If you lose a property tax exemption, you’ll see an increase in tax bill, and thus your monthly payments as well.

If there’s a shortage in your escrow account because of a property tax increase, your lender will ask you to pay a lump sum of the shortage amount or break it into 12 payments that are added to your monthly mortgage payment. So if you’re $120 short, you could either pay the lender one payment of $120 or add $10 to your monthly payment for the year.

3. Homeowners Insurance

Homeowners insurance protects your home in the event of a disaster that harms or even destroys your house. Lenders require buyers to get this type of policy after purchasing their property. After all, the lender is making an investment in the home by lending you the money to buy it, so they want to protect their investment.

When it comes to homeowners insurance policies, changing providers, adding coverage or making renovations can alter a homeowners insurance premium and cause a mortgage payment increase. Providers may also raise rates annually due to area-based effects like climate change, adjustments in internal policy or an uptick in claims processing.

4. Interest Rate

A fixed-rate loan means the mortgage rate that you lock in when you purchase your home will be the same over the entire course of the loan. If you have an adjustable-rate mortgage (ARM), that means your mortgage interest rate can fluctuate throughout the life of the loan. The type of loan you qualify for depends on a number of variables, including your credit score, income, current debt and credit history.

Many times, an ARM starts with a fixed rate for a certain period of time, typically 3 – 10 years. However, an ARM’s payment amount will change annually or semi-annually once the fixed-rate period has ended. This can result in an increase in your monthly interest payment if you started off with a lower interest rate upfront.

Some factors that can affect a home loan’s interest rate include growing inflation or a change in the federal funds rate. When inflation rates increase, so do mortgage interest rates. Sometimes the Federal Reserve may raise the federal funds rate in order to keep inflation in check, which can also have the side effect of raising the interest rates on mortgages.

5. Servicemember Benefits

As part of the Servicemembers Civil Relief Act, home buyers who are on active duty enjoy certain protections. For the duration of active duty and one year afterward, servicemembers are not required to pay late fees and cannot be foreclosed on by a lender.

Importantly, the law also caps the interest rate of active duty servicemembers at 6%. If your mortgage loan agreement is for a higher interest rate, this could be a reason that your mortgage goes up. After your tour of active duty, your interest rate would return to the higher one outlined in your mortgage agreement.

How Can I Lower My Monthly Mortgage Payment?

What goes up can also come down. This means all of the previously mentioned factors can also decrease and therefore lower your mortgage payment. In addition, there are other changes that can lower a borrower’s payment as well.

1. Remove Mortgage Insurance

If you put less than 20% down on a home, your lender will require you to take out private mortgage insurance (PMI). However, once you have 20% equity in the home, the mortgage servicer can remove it. Removing PMI from a loan will help lower the monthly payment.

In addition, an FHA loan will require mortgage insurance premiums (MIP) as well, but this is harder to remove than PMI on a conventional loan. FHA loans require a smaller down payment than conventional loans, but the restrictions are usually greater. 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 way to get rid of it would be to refinance into a conventional mortgage.

2. Refinance

Another way a homeowner can lower their monthly payment is by refinancing their loan. Here are a few key ways you can lower your monthly mortgage payment by refinancing.

• 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 a monthly payment, since the total cost of the loan would be spread out over a longer period.
• 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. Talk to a mortgage professional to see if this might be a good option for you.

3. Switch Up Your Homeowners Insurance

You might be able to lower your monthly mortgage payment by making changes to your homeowners insurance policy. You could seek out a new homeowners insurance provider altogether.

There’s an important caveat, though. Whether changing up your existing plan or moving to a new provider, be sure to maintain the same right level of coverage to protect you and your home.

4. Appeal Your Property Assessment

Having a high property assessment will mean higher property taxes. Unfortunately, experts at the National Taxpayers Union Foundation estimate that between 30% and 60% of properties nationwide are over-valued, while only 5% of taxpayers appeal their assessments.

If your monthly payments have largely increased due to a change in your property tax, you might want to consider appealing your home’s property assessment. In general, you’ll want to:

• Determine your area’s deadline for appeal
• Use a third-party assessor (such as a real estate agent)
• Bring all relevant information to the appeals board

Also, homeowners should understand that appeals can go both ways. While it is the norm for an appeal to result in a lower assessment, that’s not always the case. There is a small possibility that your property could be assessed for a higher value than your initial assessment.

The Bottom Line

There are four main factors that can affect a mortgage payment: escrow account, property taxes, homeowners insurance and interest rate. Members of the armed forces may also see a rise in mortgage payments when they come off active duty. To help your payment go in the right direction, consider removing your mortgage insurance or refinancing your loan, if possible. Ready to learn more? Start by talking to a Home Loan Expert today!