Why does my mortgage keep going up?

One of the primary reasons to buy a home rather than rent is the stability of payments. So, it’s disappointing if your mortgage statement arrives and your payment has increased. It sucks, but mortgage payments can fluctuate in either direction over time due to various factors. While the mortgage itself may or may not be the reason for the increase, understanding the factors involved may help you better cope with changing payments.

Can my mortgage payment go up?

Yes. There are several reasons your mortgage payment can increase.

Property tax changes

Property tax is charged based on your home value by local government authorities to pay for functions like garbage collection and emergency services. These tax dollars also fund public schools. Many people pay property taxes using an escrow account to spread the cost over the year.

Once a year, your mortgage servicer analyzes your escrow expenses to make sure they’re collecting enough to pay your property taxes and homeowners insurance premiums.

If your property tax bill goes up because your home gained value, you may not have enough in your escrow account to cover the entire amount when it’s due.

If your escrow account is short, you either can pay the shortage amount in a lump sum or spread it out over the next year’s payments. Remember, even if you pay off the shortage in a lump sum, your escrow payment for taxes still will increase to cover the higher bill.

You may be asked to pay back more than your tax bill. Mortgage servicers will build in an escrow commission of a month or two worth of escrow payments to try to avoid the balance in your account going negative. You do get this back when the loan is paid off if your escrow account isn’t transferred to a new loan.

There are several more reasons your property tax bill can change.

Reassessment

Your home’s value may be reassessed to make sure your tax bill accurately reflects your property’s value.

How often and what time of year homes are assessed varies from once a year to only when the home is sold or the property is improved. If your lender analyzes your escrow expenses and decides how much you need to pay monthly to cover your tax bill a few months before your home is reassessed at a higher value, you can end up with an escrow shortage.

Exemptions

If you qualify for a property tax exemption, it means that some or all of the property value that would normally be taxable isn’t. States often have complete or partial property tax exemptions for primary residences, sometimes referred to as a homestead exemption. Exemptions for disabled veterans and seniors are common.

States and counties may have rather lengthy lists of exemptions and who qualifies, so check the law in your area. One way to lower your property tax bill is to make sure you’re claiming all the exemptions you can. Rather than an exemption, some states will give you credits on income tax to pay property tax.

Homeowners insurance changes

Homeowners insurance reimburses you for the cost of repairs to your home if it’s damaged. It also covers you for liability claims, if there’s an accident, personal property damage, or theft on your property.

If you have a mortgage, your lender requires you to buy homeowners insurance. This is another expense many homeowners pay with an escrow account.

The cost of homeowners insurance may increase for a number of reasons, including a greater risk of damage to your home, the cost of repairing or replacing homes going up, or changes in your coverage amount.

You usually can shop around for a policy and switch insurers whenever you like, but if you change:

1. You’ll need to inform your lender. Because of the financing, your lender is named on the insurance policy. Rocket Mortgage^® clients may update their coverage here.
2. Send any refund to your servicer. Homeowners insurance policies are typically paid when taken out and annually on the renewal date. You’re going to want to send any refund you receive to your servicer to avoid a significant escrow shortage.

Adding an escrow account

Some homeowners prefer to pay their property taxes and homeowners insurance bills themselves instead of using an escrow account. This reduces their monthly payment to their mortgage servicer, but they are still required to pay those bills on time and in full. If you closed your loan without an escrow account and later decide to add one, your mortgage payment would increase to cover those costs.

Why did my escrow payment go up?

Aside from property tax and insurance premium increases, some mortgage servicers charge a fee to set up your escrow account. Additionally, if you pay mortgage insurance or miss a homeowners insurance or property tax payment, your lender may require you to pay into an escrow account.

Interest rate increases

Your mortgage interest rate can increase if you have an adjustable-rate mortgage. After an initial period with a fixed rate, the interest charged on an ARM adjusts at regular intervals according to market rates. How much your rate can increase in any one adjustment or from your initial interest rate is usually capped.

If you have a fixed-rate mortgage, your mortgage rate won’t change. The exception is if you have a temporary buydown through your mortgage lender or the seller of your home. If so, your interest rate adjusts upward one or more times until reaching your permanent rate.

Mortgage refinance

Mortgage refinancing replaces your current home loan with a new one. Homeowners often refinance to reduce their interest rate, change their loan term, or borrow equity to consolidate debts or pay for home improvements.

As an example, consider a 15- vs. 30-year mortgage. A 15-year mortgage means a lower rate, but a bigger monthly payment. A 30-year mortgage flips this equation.

When considering whether you should refinance, it’s important to think about the big picture, which means accounting for closing costs. The loan’s annual percentage rate includes both the note rate on the mortgage and the associated closing costs. The bigger the change between the base rate and the APR, the higher the closing costs.

Loss of service member benefits

The Servicemembers Civil Relief Act provides various forms of obligation relief for clients who are on active duty in the military. There are a variety of protections, but the one pertinent to this discussion is that for the period of active duty and a year after, interest rates above 6% are reduced to that level.

When the SCRA protections expire based on your active duty, your mortgage payment will increase.

New fees

New servicing fees can also increase your mortgage. Rocket Mortgage^® doesn’t do this, but some servicers may charge a fee to send a paper statement or to pay by phone. There also can be fees associated with administering escrow accounts.

To avoid superfluous servicing fees, you can contact your servicer to see if they’ll reduce or remove these.

Can my mortgage payment go down?

While we’ve spent a lot of time talking about why mortgage payments go up, they also can go down.

Interest rate decreases

If you have an ARM and market rates decrease, your loan’s rate can adjust downward as well. The same limits on how much your interest rate can increase also affect how much it can fall. This is called a floor. Your interest rate will never fall below the lender’s margin.

At a time of falling interest rates, you might take the opportunity to secure the best mortgage rate possible over the long term. You might choose to do a rate-and-term refinance to go from an ARM to a fixed-rate.

Escrow payment decreases

If there’s a reduction in your property taxes or you find a way to save money on homeowners insurance, you could end up with more money in your escrow account than you need to pay those bills. If you end up with an escrow overage, your mortgage servicer usually issues an escrow refund within 30 days of its next analysis.

Mortgage insurance removal

Mortgage insurance helps compensate a lender if you default on your loan and your home is foreclosed upon. Private mortgage insurance, or PMI, typically is required when you make a down payment of less than 20% on a conventional loan. Federal Housing Administration loans also require mortgage insurance, which you pay either for 11 years or the full loan term, depending on your down payment.

There are circumstances in which this monthly fee no longer applies. Let’s take a look at the rules for the removal of different types of mortgage insurance.

Conventional PMI

If you bought and live in a single-unit home purchased with a conventional loan, you can ask your lender to cancel PMI payments once you reach 20% equity.

If there’s no request, PMI payments are automatically canceled when you reach 22% equity or the midpoint of your loan term, whichever comes first.

When there’s more than one unit or you’re requesting PMI removal based on market value increases or home improvements, there are different rules for how to get rid of PMI.

FHA MIP

Mortgage insurance premiums, or MIP, serve the same purpose as PMI payments. The rates are set by the government, and the rules for FHA mortgage insurance removal are based on your down payment and when your loan closed:

• For all loans made in the past decade, MIP is permanent if your down payment is less than 10%. If the down payment is 10% or more, you pay MIP for 11 years.
• If your mortgage closed before June 3, 2013, MIP comes off automatically once you reach 22% equity, provided you’ve paid it for at least 5 years. The waiting period doesn’t apply to 15-year loans.

In addition to the monthly premiums, there’s an upfront mortgage insurance payment that’s usually 1.75% of the loan amount.

While MIP might be unavoidable with an FHA loan, you can avoid paying mortgage insurance moving forward if you refinance to a conventional mortgage once you have 20% equity.

FAQ

Here are answers to common questions about changes in your mortgage payment.

Why would my mortgage payment go up?

The most common reason mortgage payments go up you need more money in your escrow account to pay property taxes and homeowners insurance premiums. It also can increase if you have an ARM and your rate adjusts upward. Less commonly, you’ll see your mortgage payment go up if service member protections under the SCRA expire.

Is it normal for a mortgage to go up every year?

If you have an escrow account, your mortgage could very well go up every year with changes in your taxes and homeowners insurance. Ways to mitigate this include shopping around for homeowners insurance and claiming all property tax exemptions you qualify for.

How do I stop my mortgage from going up?

You may be able to keep your mortgage payment from going up by refinancing to a loan with a lower rate or longer term, but this is market-dependent and may cost you more interest overall.

How can I avoid escrow account shortages?

You can avoid escrow shortages by monitoring your property tax bill and homeowners insurance premiums. When notified of an increase, you can notify your lender and make extra payments to avoid a shortage.

How can I prepare financially for mortgage payment increases?

The key to successfully handling mortgage payment increases is to keep on top of your budget. You also can look into refinancing, depending on the market, to make sure you’re getting the best possible rate and payment.

The bottom line: Understand these factors that can change your mortgage payments

Mortgage payments may go up or down depending on fluctuations in your interest rate, property taxes, and homeowners insurance. Increases are sometimes unavoidable, but you can shop around for the best deal on homeowners insurance or make sure you apply for all the property tax exemptions you qualify for.

In some cases, you may be able to refinance into a lower rate or longer term to make the payment better fit your budget. If you want to look into your options with Rocket Mortgage, you can apply online.