Why does my mortgage keep going up? Factors that can change your monthly payments

When many would-be homeowners imagine what being a homeowner is like, they imagine closing on their loan and making monthly mortgage payments that never change. Everything just settles into a pleasant and predictable pattern.

Then the mortgage payment unexpectedly increases, and the predictable pattern is broken. So, what happened?

Many homeowners assume, at least in the short term, that their housing costs will remain fairly steady. But an unexpected jump in monthly mortgage payments can leave homeowners feeling blindsided by their mortgage – and scrambling to readjust their budgets.

Can my mortgage payment go up?

It’s true. Your mortgage payment can go up – even with a fixed-rate mortgage. In fact, your monthly mortgage payment can fluctuate several times over the term of the loan.

If your monthly payment has gone up or down, the first order of business is to figure out why. Here are the top reasons mortgage payments change:

Property tax changes

Property taxes going up or down can cause a mortgage payment change. Most people pay their property taxes (and homeowners insurance) through an escrow account. With an escrow account, the cost of your property taxes is spread out in equal payments over a year, so you don’t have to pay your entire tax bill in one shot.

If a tax increase causes a shortfall in your account, your lender will cover the difference until your next escrow review. Following the review, your monthly payment will increase to cover the shortfall, and your lender will increase the tax estimate to ensure sufficient future coverage. Your mortgage servicer conducts an escrow analysis once a year, which may not coincide with your property tax evaluation.

The good news is that your tax payments will only change under certain circumstances.

Reassessment

Occasionally, your mortgage payment may go up or down due to a property value reassessment. The frequency of property reappraisals can differ by location. It may happen once a year, every 2 years or only when a house changes owners.

Exemptions

The loss of property tax exemptions can also drive your mortgage payment up. Some states and municipalities require you to reapply for your exemptions every year.

If you received a tax bill estimate from the previous homeowner and it looks different from your tax bill, they likely qualified for exemptions that you don’t, and vice versa. Exemptions are based on an owner’s qualifications.

Contact your local tax office with questions about exemptions or changes to your taxes.

Homeowners insurance

If you have a mortgage, you’re required to have homeowners insurance. It protects you and your lender against damage to your house. Your lender may secure a policy if you don’t have a current policy or it's expired.

If your lender sources the insurance, it may be more expensive than shopping around for your own policy and cause your mortgage payment to increase.

Your escrow account may experience a shortfall if you change homeowners insurance policies, and your lender has to cover the difference. Another reason you may not have enough in your escrow account to cover your payment is if your premium suddenly increases.

Adding an escrow account

Sometimes, homeowners can choose between having an escrow account or making annual property tax and homeowners insurance payments directly. When they no longer want to make lump-sum payments, homeowners can add an escrow account at some point over the mortgage term.

Why did my escrow payment go up?

Escrow payments usually go up due to increasing insurance costs or taxes. If you opt to add an escrow account later in your mortgage term, it may involve additional fees to set up and manage the account.

Fortunately, the cost to set up and manage the account shouldn’t exceed one-sixth of your annual escrow payments.

If you miss a tax or insurance payment, your state or local government may impose a fine or initiate foreclosure. To prevent this from happening again, a lender or servicer may require an escrow account after the missed payment to ensure on-time payments.

Interest rate adjustments

Your mortgage payment will change after a certain period if you have an adjustable-rate mortgage (ARM).

An ARM’s initial rate is generally lower than comparable fixed rates. After its initial rate period (usually 5, 7 or 10 years), the rate is variable and typically changes every 6 months to a year, riding the fluctuations of the global financial markets. Then the remaining loan term is re-amortized at the new interest rate.

While your mortgage payment will spike or drop as mortgage rates change, there are limits to how much a rate can go up or down from its initial rate.

Mortgage refinance

Refinancing your mortgage loan can cause your monthly payments to change – sometimes, by a lot.

Your monthly housing bill can decrease if you refinance to a lower interest rate or a longer loan term. However, if you refinance to a shorter loan term (for example, from a 30-year to a 15-year home loan) to pay off your home faster and save on interest, your monthly payment will go up.

If you’re thinking about refinancing, make sure you can afford any changes to your monthly payment.

Service member benefits

The Servicemembers Civil Relief Act (SCRA) provides certain protections to service members on active duty.

During active duty and for 1 year following the end of the assignment, service members don’t pay late fees, their lender can’t foreclose on their home and their mortgage interest rate stays capped at 6%.

Once the period expires, their monthly payments may increase.

New fees were charged

The answer to why your payment changed could be that your lender added new servicing fees to your monthly bill. To confirm, check your monthly mortgage statement for any unfamiliar fees. Also, consider talking to your lender to see if you can remove any new fees.

Can my mortgage payment go down?

We’ve covered instances when your mortgage payment can increase, but it can decrease, too. Your mortgage payment can drop with decreases in interest rates, property taxes or homeowners insurance – and the removal of mortgage insurance.

Mortgage insurance removal

When you remove mortgage insurance, your payment usually experiences a slight drop.

Homeowners typically pay mortgage insurance because they put down less than 20%, or it’s a requirement of the home loan, such as a Federal Housing Administration (FHA) loan. Mortgage insurance is typically rolled into your total mortgage payment each month.

How you remove mortgage insurance will depend on the type of mortgage you obtained.

Removing conventional PMI

Mortgage insurance for a conventional loan is called private mortgage insurance (PMI). You pay PMI on a conventional loan if you make a down payment of less than 20% of a home’s purchase price.

Once you reach 20% equity in your home (the difference between what a home is worth and what you owe), you can ask your servicer to remove PMI.

PMI automatically cancels once you reach 22% equity based on your original loan payoff schedule or the midpoint of your mortgage term (whichever comes first).

If you don’t want to wait for PMI to auto-cancel, contact your lender and request its removal once you reach 20% equity in your home.

You can also remove PMI by proving your property value has increased based on market conditions or home improvements. However, the equity threshold you’ll need to reach to remove PMI may be slightly higher in these situations. And it may also depend on how long you’ve held the mortgage.

Removing FHA MIP

Mortgage insurance for an FHA loan is called a mortgage insurance premium (MIP). Removing mortgage insurance from an FHA loan can be slightly more complex.

For FHA loans that closed on or after June 3, 2013, MIP is eligible for removal if you make at least a 10% down payment and pay mortgage insurance for at least 11 years. If your down payment is less than 10%, you’ll pay MIP for the life of the loan.

If you closed on the loan before June 3, 2013, MIP is eligible for removal once you reach 22% equity in your home. For loan terms longer than 15 years, you must have paid MIP for at least 5 years.

If you don’t want to pay MIP for the life of your FHA loan, consider refinancing to a conventional loan. As long as you refinance with 20% equity in the home, you won’t pay PMI.

The bottom line

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.

If you’re looking to buy or refinance your home, apply online with Rocket Mortgage^® to see what you can afford. You can also give us a call at (833) 326-6018.