You closed your loan and your mortgage payment hasn’t changed since. You make your payment every month, and everything settles into a nice pattern of normalcy. It’s all very pleasant.
Suddenly, there comes a month when your mortgage payment has gone up. What’s the deal?
Most of us tend to assume, at least in the short term, that our housing costs will remain fairly steady. An unexpected change to our monthly mortgage payment can come as a bit of a shock, not just to us, but to our budgets as well.
If your monthly payment has gone up or down, the first thing you’ll want to do is figure out why. Here are the biggest reasons your mortgage payments change.
Property Tax Changes
Your property taxes going up or down can cause a mortgage payment change. Most people pay their taxes and insurance into an escrow account. Escrow accounts are helpful because they mean you don’t have to pay your entire tax bill in one shot. Instead, your taxes are spread out in equal payments over the course of the year.
If there’s a shortage in your account because of a tax increase, your lender will cover the shortage until your next escrow analysis. When your analysis takes place, your monthly payment will go up in order to cover the time you were short and to cover the increased tax payment going forward. Your mortgage servicer only does an escrow analysis once a year, and it won’t necessarily be the same time that your property tax is evaluated.
Some good news is that your tax payments will only change in certain situations.
Occasionally, your property value will be reassessed, and this will cause a change in your taxes that may cause your mortgage payment to go up or down.
Different locations have different requirements for how often property value is reassessed. It could be once every year or two, or a city may choose to reassess only when a house changes owners.
The loss of tax exemptions can also drive your mortgage payment up. Some states and municipalities require that you reapply for your exemptions every year.
This aspect of your property taxes may also cause confusion if you’ve gotten a tax bill estimate from the previous homeowner. They may qualify for exemptions that you don’t and vice versa.
If you have a mortgage, you’re required to have homeowners insurance. It protects both you and your lender against damage to your house. If you don’t have a current policy or yours has expired, your lender may find one for you.
If your lender finds the insurance, it may be more expensive than it would be if you shopped around for your own policy. This can cause your mortgage payment to increase.
A shortage can occur in your escrow account if you change homeowners insurance policies, and your lender has to make unanticipated payouts. This may also happen if there are increases in the cost of premiums, even if you have the same insurance carrier.
Mortgage Insurance Removal
The removal of your mortgage insurance payment might be one of the few instances where you’ll be glad to hear your monthly payment is changing, as it generally means your payment will go down a bit.
If you’re required to pay mortgage insurance, either because you put down less than 20% or you have a home loan that requires it (such as an FHA loan), that cost will be rolled into your total payment each month.
What does it take to get this cost removed, lowering your monthly mortgage payment? It depends on the type of mortgage you have.
Removing Conventional PMI
If you have a conventional loan, your mortgage insurance is called private mortgage insurance, or PMI. You have to pay PMI on a conventional loan if you make a down payment that’s less than 20% of the home’s purchase price.
Once you reach 20% equity in your home (meaning the difference between what the home is worth and what you owe on it), you’ll be able to get rid of PMI.
Your PMI will auto-cancel once you reach either 22% equity or the midpoint of your mortgage term (whichever comes first).
If you don’t want to wait for PMI to auto-cancel, you can contact your lender and request to have it removed once you reach 20% equity in your home.
Removing FHA MIP
Mortgage insurance on FHA loans is called mortgage insurance premium, or MIP. Removing mortgage insurance on an FHA loan can be a little trickier.
For FHA loans that closed on or after June 3, 2013, MIP can only be removed if you made a down payment of at least 10% and have paid mortgage insurance for at least 11 years.
If you made a down payment lower than 10%, you’ll have to pay MIP for the life of that loan.
If, on the other hand, your loan closed beforeJune 3, 2013, MIP can typically be removed once you reach 22% equity in your home.
Stuck with MIP for the life of your FHA loan? You might want to consider refinancing into a conventional loan. As long as you have 20% equity in the home, you won’t have to pay PMI.
Adding An Escrow Account
As a homeowner, you sometimes have the option of choosing to have an escrow account or making your tax and insurance payments on your own when they come due. You may choose to have an escrow account added at some point over the term of your mortgage so you can stop making lump sum payments.
Why Did My Escrow Payment Go Up?
As we previously mentioned, if your escrow payment goes up, it’s typically due to an increase in insurance costs or taxes. However, if you don’t already have an escrow account, adding one will come with some new costs.
Adding an escrow account will increase your mortgage payment, in order to cover your monthly tax and insurance payments. You’ll also have to put in a little bit extra upfront in order to set up the account. The good news is that it won’t be more than one-sixth of your total escrow expenditures for the year.
If you miss a tax or insurance payment, your state or local government may choose to initiate a foreclosure or impose fines. To avoid this, a lender or servicer may require that an escrow account gets set up following a missed payment, to make sure the payments are made going forward.
Interest Rate Adjustments
Your mortgage payment also changes after a certain period if you have an adjustable rate mortgage (ARM).
ARMs have a rate that’s generally lower than comparable fixed rates. After some time (usually 5 or 10 years), the rate becomes variable and changes once a year, riding the seesaw movements in the global financial markets. Your mortgage is then re-amortized over the remainder of the loan term at the new rate.
Your mortgage payment will go up or down as mortgage rates change. It’s important to note that there are limits to how much your rate can go up from the initial rate you were given.
If you’re considering an ARM, be sure to look over the terms ahead of time so you know the maximum amount your rate can go up, not just after a single adjustment but also over the life of the loan, and make sure you can afford those potential increases.
Refinancing your mortgage loan will usually cause your monthly payments to change – sometimes, by a lot.
In some cases, your monthly housing bill will actually go down, like if you refinanced to a lower interest rate or a longer loan term. However, there are also situations where a refinance will cause your monthly payment to go up, like if you refinanced to a shorter loan term (for example, from a 30-year to a 15-year) to pay off your home faster and save money on interest costs.
If you’re thinking about refinancing, make sure you can afford the changes it will make to your monthly payment.
If you are a servicemember, the Servicemembers Civil Relief Act (SCRA) provides you with certain protections while you’re on active duty.
During the time you’re on active duty and for 1 year following the end of your active duty assignment, you can’t be forced to pay late fees, your lender can’t foreclose on your home and your mortgage interest rate can’t rise above 6%.
Once this period has passed, you may notice your monthly payments increase if, for example, your contractual interest rate is above 6%.
New Fees Were Charged
The answer to why your payment changed may simply be that your lender has added new fees to your monthly bill, increasing your payment. To find out, check your monthly mortgage statement to see if any new items were added.
If you notice anything new or unusual in your monthly statement, contact your mortgage lender to ask about it.
Preparing For Changes To Your Monthly Mortgage Payment
Unfortunately, circumstances change and unexpected costs can pop up. This is why it’s important to be prepared and seriously think about how major financial decisions might affect your wallet in the long run.
Making sure you aren’t buying more home than what you can comfortably afford, saving money for unforeseen expenses and keeping track of your finances can help ensure that when things change, they don’t put your financial health in jeopardy.
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