When you secure a mortgage, it’s common to expect a consistent monthly payment throughout the loan term. While this is sometimes the case until your mortgage is fully paid off, many homeowners find their monthly mortgage payments can change over the life of the loan. Understanding Why Did My Mortgage Go Up is crucial for financial planning and stability.
This fluctuation can occur if you have an adjustable-rate mortgage (ARM), where the interest rate shifts after a predetermined period. However, even with a fixed-rate mortgage, your payment can still increase due to several other factors.
If you’ve noticed your mortgage payments rising or anticipate a future increase, this guide will explore the common reasons behind these changes.
Common Reasons for Mortgage Payment Increases
Mortgage payment increases can stem from various sources. Let’s delve into the primary reasons why your monthly payment might be going up.
Escrow Account Adjustments: Property Taxes and Homeowners Insurance
One of the most frequent reasons for a mortgage payment increase is adjustments to your escrow account, specifically related to property taxes and homeowners insurance. Many mortgages include an escrow account to manage these recurring expenses.
Escrow accounts simplify budgeting by dividing your annual property tax and homeowners insurance bills into 12 equal monthly installments, paid along with your principal and interest. This prevents the burden of large, lump-sum payments each year. However, when your property taxes and/or homeowners insurance premiums rise, the amount needed in escrow also increases.
Alt text: Illustration of a house with a dollar symbol above, representing rising property taxes impacting mortgage escrow accounts.
Escrow Shortages and Overages
Property tax assessments and homeowners insurance rates are subject to change. These adjustments may not always coincide with your escrow analysis schedule, leading to potential shortages or overages in your escrow account.
If your property taxes or homeowners insurance costs decrease, you’ll receive a refund check for the excess funds you’ve paid into escrow. Conversely, an escrow shortage occurs when your account doesn’t hold enough to cover these expenses. Your mortgage lender will still ensure your tax and insurance obligations are met by paying the required amount. However, to compensate for this shortfall, your monthly mortgage payment will increase.
If you face an escrow shortage, you generally have two options:
- Lump-Sum Payment: Cover the entire shortage amount with a single payment.
- Increased Monthly Payments: Spread the shortage over the next 12 months, resulting in a higher monthly mortgage payment.
A significant escrow shortage can arise if you change homeowners insurance policies. When you cancel your previous policy, you typically receive a prorated refund. To prevent an escrow shortage, it’s essential to forward this refund check to your mortgage servicer to be credited to your escrow account.
Proactive monitoring of your escrow account is key to avoiding payment surprises. Keeping an eye on your escrow account trends allows for better financial planning and timely adjustments if needed.
Changes in Mortgage Insurance Premiums
While a 20% down payment is ideal when purchasing a home, many homebuyers utilize low down payment options. These options often require mortgage insurance as a condition of the loan. For instance, conventional loans with down payments below 20% usually necessitate private mortgage insurance (PMI).
PMI increases your monthly mortgage payment. However, this is not a permanent addition. Once you achieve 20% equity in your home, the PMI requirement typically ends, leading to a decrease in your monthly payment.
Mortgage insurance rules vary depending on the loan type. For example, USDA loans, while not technically requiring mortgage insurance, have guarantee fees – an upfront fee and an annual fee divided into monthly payments within your mortgage. These fees are currently 1% and 0.35% of the loan balance, respectively.
FHA loans and conventional loans have distinct guidelines regarding mortgage insurance, which we’ll explore further.
Removing FHA Mortgage Insurance Premium (MIP)
For FHA loans originated on or after June 3, 2013, removing the mortgage insurance premium (MIP) is possible only if you made a down payment of 10% or more and have paid MIP for at least 11 years. If your down payment was less than 10%, MIP payments are required for the entire loan term.
For FHA loans closed before June 3, 2013, MIP can be cancelled once you reach 22% equity in your home, regardless of the down payment amount or the duration of mortgage payments. Whether MIP ends after 11 years or at 22% equity, its removal will reduce your monthly mortgage payment.
If you wish to eliminate ongoing mortgage insurance premiums but cannot due to loan terms, refinancing to a conventional loan might be a viable option.
Removing Conventional Loan Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI), specific to conventional loans, can be avoided altogether with a 20% or greater down payment. Alternatively, PMI can be cancelled later once you’ve built up 20% equity in your home.
However, exceptions to this rule may exist. Consult with your lender to understand the specific conditions for PMI removal from your monthly mortgage payment.
End of Service Member Civil Relief Act (SCRA) Benefits
The Servicemembers Civil Relief Act (SCRA) provides financial protections to active-duty service members. These protections are in effect from the date of entering active duty until one year after the active-duty assignment ends. SCRA benefits include:
- Waiver of late payment fees.
- Protection against foreclosure.
- A capped interest rate of 6% during active-duty service.
These benefits are temporary. When the SCRA protection period ends, your mortgage payment may increase if you were previously benefiting from the interest rate cap or late fee waivers. This is because the interest rate might revert to the original contractual rate, and standard fees will apply again.
Adjustable-Rate Mortgage (ARM) Adjustments
As previously mentioned, if you have an adjustable-rate mortgage (ARM), interest rate adjustments are a primary reason for potential mortgage payment increases. Unlike fixed-rate mortgages, ARMs have an initial fixed interest rate for a specific period, after which the rate adjusts periodically.
For example, a 7-year ARM has a fixed interest rate for the first 7 years. This type of ARM may be advertised as a 7/6 ARM. The second number indicates how frequently the interest rate adjusts after the initial fixed period – in this case, every 6 months.
When an ARM adjusts, the new interest rate is determined by adding a margin to a specific index. The index used depends on the investor in your mortgage. For conventional loans backed by Fannie Mae or Freddie Mac, the interest rate is typically adjusted based on the 6-month Secured Overnight Financing Rate (SOFR). For FHA or VA loans, the adjustment often relies on the 1-year Constant Maturity Treasury (CMT) index.
ARM loans often include interest rate caps to limit payment shock. For example, a cap structure of 2/1/5 means:
- 2% Initial Cap: The interest rate cannot increase or decrease by more than 2% at the first adjustment.
- 1% Subsequent Cap: In subsequent adjustment periods, the rate cannot change by more than 1%.
- 5% Lifetime Cap: The interest rate will never increase or decrease by more than a total of 5% over the life of the loan.
These caps help provide some predictability, but ARM adjustments can still lead to payment increases if the underlying index rates rise.
Alt text: Icon of a house with an arrow circling back, symbolizing home refinancing as a solution to manage mortgage payments.
FAQs: Understanding Your Rising Mortgage Payment
Let’s address some common questions about why your mortgage payment might be going up:
Why is my mortgage payment increasing?
Several factors can cause your mortgage payment to rise. The most common include increases in property taxes, homeowners insurance premiums, or both. If you have an adjustable-rate mortgage, the end of the initial fixed-rate period and subsequent interest rate adjustments will also lead to payment increases.
Can escrow issues cause my mortgage to go up?
Yes, escrow account adjustments are a frequent cause of mortgage payment increases. Escrow accounts are used by lenders to pay your property taxes and homeowners insurance. If these costs increase, an escrow shortage occurs, leading to higher monthly mortgage payments to cover the shortfall.
How can I prevent my mortgage payments from rising?
While some factors are outside your control, you can take steps to potentially mitigate mortgage payment increases. Refinancing your mortgage to a lower interest rate (if rates have decreased since you originated your loan), shopping for more affordable homeowners insurance, and eliminating mortgage insurance (if eligible) are strategies to consider. Additionally, paying an escrow shortage in a lump sum can prevent a monthly payment increase due to escrow adjustments.
In Conclusion: Mortgage Payments Can Change
Mortgage payments are not always static and can change due to various factors. Understanding these reasons is essential for homeowners to manage their finances effectively. If you have an adjustable-rate mortgage and seek greater payment stability, refinancing to a fixed-rate mortgage can provide predictability regarding interest rate fluctuations. While it won’t eliminate potential changes from escrow or insurance, it removes the uncertainty of interest rate-driven payment increases.
Explore Your Home Affordability
If you’re concerned about mortgage payment fluctuations or looking for refinancing options, resources are available to help you find a suitable lender and explore your options.
