When you become a homeowner, it’s natural to expect your mortgage payment to remain stable, especially with a fixed-rate loan. However, many homeowners find that their monthly payment gradually increases, leading them to wonder: “Why has my mortgage payment gone up?”
Whether you’re managing a home in Denver, CO or owning a property in Orlando, FL, this informative Redfin article delves into the common reasons behind rising mortgage payments and provides strategies to reduce them.
Why has my mortgage payment increased?
An uptick in your monthly mortgage payment doesn’t necessarily indicate an error on your part. While your principal and interest may remain constant, changes in your escrow account can drive the increase. Here are the primary factors:
1. Adjustments to the escrow account
Lenders typically establish an escrow account to collect funds for property taxes and homeowners insurance. If these expenses rise, your lender will raise the escrow portion of your payment, even if your principal and interest remain unchanged. Annually, lenders conduct an escrow analysis, and if there’s a deficit, your payment will go up to cover it.
>>Read: Understanding Escrow
2. Escalation in property taxes
Local authorities may reassess the value of your home, resulting in higher property taxes. If your tax bill increases or you lose a tax exemption, your escrow contribution will also rise, leading to a higher monthly mortgage payment.
For instance: If your escrow account is deficient by $240, your lender might add $20 per month to your mortgage for the following year.
3. Surge in homeowners insurance premiums
Lenders mandate homeowners insurance to safeguard their investment. Premiums can increase if you:
- Switch providers
- Add more coverage
- Upgrade or renovate your home
- Reside in an area with increasing claims or climate-related risks
When premiums rise, more funds are required in your escrow account, resulting in a higher monthly payment. For example, if your annual premium goes up by $120, your lender may add $10 to your monthly mortgage payment.
4. Resets on adjustable-rate mortgages (ARMs)
If you have an adjustable-rate mortgage, your initial interest rate is fixed for a specified period (typically 3, 5, or 7 years). Once this period ends, your rate adjusts annually or semi-annually. If current rates are higher than when you initially secured the loan, your monthly mortgage payment can significantly increase. Conversely, if rates decrease, your payment could decline.
Inflation, alterations to the federal funds rate, or broader market conditions can all contribute to higher mortgage rates.
5. Expiration of servicemember benefits
Active-duty military personnel are safeguarded by the Servicemembers Civil Relief Act (SCRA), which caps mortgage rates at 6%. Once your active duty concludes, your loan reverts to the originally agreed-upon higher rate, leading to increased payments.
How can I reduce my monthly mortgage payment?
The encouraging news is that just as payments can rise, there are methods to bring them back down. Here are practical steps homeowners can take:
1. Eliminate mortgage insurance
If you bought your home with less than a 20% down payment, you likely pay private mortgage insurance (PMI). Once you attain 20% equity, you can request its removal. Verify your current equity status on your loan statement or by contacting your lender. Getting rid of PMI can significantly decrease your monthly payment.
FHA loans present a challenge: mortgage insurance often remains for 11 years or the duration of the loan unless you refinance into a conventional loan.
2. Refinance your loan
Refinancing can lower your payment by:
- Securing a lower interest rate if rates decrease
- Extending your loan term to spread costs over more years (although this may increase total interest paid)
- Switching loan types (e.g., from ARM to fixed-rate or FHA to conventional)
Consult a mortgage specialist to assess potential savings.
>>Read: Is Refinancing My Mortgage a Good Idea?
3. Explore options for homeowners insurance
Changing providers or adjusting coverage can lower premiums and diminish escrow requirements. Ensure your coverage continues to adequately protect your property.
>>Read: How to Determine the Right Amount of Homeowners Insurance
4. Challenge your property tax appraisal
According to the National Taxpayers Union Foundation, up to 60% of homes are overvalued, yet only 5% of owners contest the valuation. If you believe your home’s tax assessment is inflated, you can:
- Verify your local appeal deadline
- Engage a third-party appraiser or collaborate with a real estate agent
- Present evidence to your local tax appeals board
A successful appeal can lead to lower taxes and a reduced mortgage payment.
Common inquiries about increasing mortgage payments
1. Why does my mortgage keep rising if I have a fixed-rate loan?
Even with a fixed-rate mortgage, your principal and interest remain constant, but fluctuations in your escrow account expenses, such as property taxes and homeowners insurance, can cause your payment to rise despite no changes in your rate.
2. How frequently can my mortgage payment alter?
Lenders typically review your escrow account annually. If there’s a shortfall, your payment may increase once a year. However, if you have an adjustable-rate mortgage (ARM), your interest rate and payment could adjust annually or semi-annually after the fixed period ends.
3. Can I prevent my mortgage payment from increasing?
While you can’t control tax assessments or insurance premiums, you can seek alternative insurance providers, contest your property tax assessment, or refinance to stabilize your payment. Removing PMI once you reach 20% equity is another method to prevent unwarranted hikes.
4. Why did my escrow account deficiency raise my mortgage?
If your escrow account lacks sufficient funds to cover property taxes or insurance, your lender spreads the shortage across future monthly payments to prevent account delinquency and ensure timely bill payments.
5. Will refinancing decrease my mortgage payment?
Yes, refinancing to a lower rate or extended term can reduce your monthly payment. Additionally, refinancing can eliminate FHA mortgage insurance or transition from an ARM to a fixed-rate loan for increased stability.