Why does your mortgage keep going up?

If you recently opened a statement and wondered why your mortgage payment went up, you are certainly not alone. Seeing an unexpected jump in your monthly housing costs can feel overwhelming but figuring out why can help you manage the change.

Your mortgage payment can increase due to factors like rising property taxes, higher homeowners insurance premiums, escrow changes, and interest rate adjustments on an adjustable-rate mortgage. Here’s a closer look at reasons why your mortgage payment can change to help you anticipate any future changes to your budget.

Key takeaways:

• Escrow changes are a common reason payments change: Increases in property taxes or homeowners insurance can cause your escrow portion to rise, leading to a higher monthly mortgage payment.
• Adjustable-rate mortgages can change over time: If you have an adjustable-rate loan, you can expect your interest rate and payment to change after the initial fixed period ends.
• Other factors can also affect your payment: An escrow shortage or changes in mortgage insurance can also result in a payment change.

Can your mortgage payment go up?

Yes. Even if you have a fixed-rate mortgage, there are several reasons your mortgage payment can increase. Let’s get into how and why.

Property tax changes

When you make your monthly payment, a portion of that money often goes into an escrow account to cover your local property taxes. These funds are used to cover public services and infrastructure. If your local government raises property tax rates, the total amount required to cover those taxes increases.

Many homeowners pay property taxes using an escrow account to spread the cost over the year. If there are changes in what you owe in property taxes, your lender will automatically increase your monthly escrow payment to make up the difference.

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.

Reassessment

Your home’s value may be reassessed to make sure your tax bill accurately reflects your property’s value. Local tax authorities periodically review the value of your property through a tax assessment to determine how much you owe in taxes. If your home has increased in value, your tax assessment will be higher. This means you’ll owe more in property taxes, so your monthly payment will increase.

How often homes are assessed varies by location. In some areas, assessments happen every year. In others, assessments may occur only after a sale or property improvement.

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.

Lenders require you to have homeowners insurance coverage to protect their investment. Like property taxes, homeowners insurance is typically paid for through an escrow account.

The cost of homeowners insurance may increase if there is a greater risk of damage or if the cost of replacing or repairing your home goes up.

You usually can shop around for a policy and switch insurers whenever you like. If you do switch insurers, be sure to inform your lender. Rocket Mortgage clients may update their coverage here.

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 your 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

When you refinance your home ¹ you replace your current 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. You can use a rate and term refinance to reduce your interest rate and monthly payment. However, it’s also important to keep in mind that your monthly payment could also increase depending on your new loan terms, your new interest rate, or your new loan balance.

For example, if you switch from a 30-year mortgage to a 15-year mortgage to pay off your home faster, your monthly payment will rise because you are compressing the repayment schedule into a shorter timeframe. Similarly, if you do a cash-out refinance to access your home equity, you are increasing your overall loan balance, which generally results in a higher monthly payment.

When considering whether you should refinance, it’s important to consider how your new loan terms would change your monthly payment. You’ll also want to account for the upfront costs. Knowing the right questions to ask when refinancing can help you decide if it is the right move for your unique financial situation.

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. For the period of active duty and a year after, interest rates above 6% are reduced to that level. However, these protections do not last forever. 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 unnecessary servicing fees, you can contact your servicer to see if they’ll reduce or remove these.

Can your mortgage payment go down?

While any homeowner would want to avoid paying a monthly payment, it’s also possible for your mortgage payment to decrease.

Interest rate decreases

If you have an adjustable-rate mortgage and market rates fall during your adjustment period, your interest rate could decrease. When your interest rate drops, the portion of your payment going toward interest becomes smaller, lowering your overall monthly payment.

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. 

Escrow payment decreases

If your local municipality lowers property tax rates or your home's assessed value drops, your property tax bill will shrink. Likewise, if you shop around and secure a cheaper homeowners insurance policy, your insurance costs will fall. When your lender conducts their annual escrow review, they may find that they have collected more money than necessary. This escrow surplus will often result in a lower monthly escrow payment moving forward and potentially a refund check.

Mortgage insurance removal

Mortgage insurance protects the mortgage lender in case the borrower defaults on the loan, which is considered a higher risk when the borrower has low home equity.

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.

Conventional PMI

If you bought a home 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.

FHA MIP

Mortgage insurance premiums, or MIP, are for government-backed loans. 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 after June 3, 2013, 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 your mortgage payment go up?

The most common reason mortgage payments increase is because the cost of your property taxes or homeowners insurance premiums has risen. Your payment could also increase if you have an ARM and your rate adjusts upward.

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. You can mitigate this change by shopping around for homeowners insurance and claiming all property tax exemptions you qualify for.

How do you stop your mortgage from going up?

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

How can you avoid escrow account shortages?

You can avoid escrow shortages by monitoring your property tax bill and homeowners insurance premiums. If your premium rises, you can notify your lender and make extra payments to avoid a shortage.

How can you 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. Even if you have a fixed-rate mortgage, it’s important to be prepared for the escrow costs to rise.

The bottom line: Understand the 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.

¹Refinancing may increase finance charges over the life of the loan.