A higher monthly mortgage payment doesn't necessarily mean you’ve done anything wrong. Mortgage payments can change even when the homeowner pays on time. Changes in your escrow account, property taxes, homeowners insurance or interest rate can increase the dollar amount of your mortgage loan payment.
1. Escrow Account
An escrow account is a legal arrangement in which a third party temporarily holds money or property until a particular condition has been met. Mortgage lenders often require their borrowers to add an escrow to hold funds for property taxes and home insurance payments. This is to ensure that the borrower does not forget to pay their tax bill or insurance premium.
The money is simply taken from the account as an escrow payment when the bills are due – usually annually or semiannually. As a result, your house payment may go up to add the funds needed to keep the escrow account full enough to cover the insurance and tax bills.
Every year, after the taxes and insurance are paid, your lender performs an escrow analysis to see if the amount you’re putting in each month will be enough to cover the bills next time. If your escrow account comes up short, an increase in your mortgage payment amount might occur to cover the expected shortage. Your lender will tell you ahead of time that your payment has changed due to an escrow analysis.
2. Property Taxes
Your property taxes can increase while you own your home for a number of different reasons. The two major reasons your property tax might go up are a reassessment or an exemption.
● Reassessment means the local municipality decided to assess the value of your home. If the property value goes up, so do the taxes.
● Property tax exemptions make you legally entitled to pay lower taxes, but they can go away. If you lose a property tax exemption, you’ll see an increase in tax bill, and thus your monthly payments as well.
If there’s a shortage in your escrow account because of a property tax increase, your lender will ask you to pay a lump sum of the shortage amount or break it into 12 payments that are added to your monthly mortgage payment. So if you’re $120 short, you could either pay the lender one payment of $120 or add $10 to your monthly payment for the year.
3. Homeowners Insurance
Homeowners insurance protects your home in the event of a disaster that harms or even destroys your house. Lenders require buyers to get this type of policy after purchasing their property. After all, the lender is making an investment in the home by lending you the money to buy it, so they want to protect their investment.
When it comes to homeowners insurance policies, changing providers, adding coverage or making renovations can alter a homeowners insurance premium and cause a mortgage payment increase. Providers may also raise rates annually due to area-based effects like climate change, adjustments in internal policy or an uptick in claims processing.
4. Interest Rate
A fixed-rate loan means the mortgage rate that you lock in when you purchase your home will be the same over the entire course of the loan. If you have an adjustable-rate mortgage (ARM), that means your mortgage interest rate can fluctuate throughout the life of the loan. The type of loan you qualify for depends on a number of variables, including your credit score, income, current debt and credit history.
Many times, an ARM starts with a fixed rate for a certain period of time, typically 3 – 10 years. However, an ARM’s payment amount will change annually or semi-annually once the fixed-rate period has ended. This can result in an increase in your monthly interest payment if you started off with a lower interest rate upfront.
Some factors that can affect a home loan’s interest rate include growing inflation or a change in the federal funds rate. When inflation rates increase, so do mortgage interest rates. Sometimes the Federal Reserve may raise the federal funds rate in order to keep inflation in check, which can also have the side effect of raising the interest rates on mortgages.
5. Servicemember Benefits
As part of the Servicemembers Civil Relief Act, home buyers who are on active duty enjoy certain protections. For the duration of active duty and one year afterward, servicemembers are not required to pay late fees and cannot be foreclosed on by a lender.
Importantly, the law also caps the interest rate of active duty servicemembers at 6%. If your mortgage loan agreement is for a higher interest rate, this could be a reason that your mortgage goes up. After your tour of active duty, your interest rate would return to the higher one outlined in your mortgage agreement.
