You have just moved out of your apartment and finally purchased your home. Payments on your mortgage have started and you are happy that you no longer have to think about the cost of your rent going up.
Or do you? Can your mortgage go up?
Several different things can cause your mortgage payment to increase or decrease. Some factors are completely out of your control and some you can control. Let’s take a look at some reasons why your mortgage payment can change.
- Your mortgage payment CAN go up
- There are things you can control with changes in your mortgage payment
- Property tax changes and insurance rate changes can cause your mortgage payment to increase
- Changes in interest rates can cause your mortgage payment to change
1) Property Tax Changes
Changes in your property taxes can cause your mortgage payment to increase. Property taxes and insurance are paid into an escrow account.
The main purpose behind an escrow account is so you don’t have to pay your property taxes and insurance in one lump sum. The payments are spread out over the year and are grouped into your monthly mortgage payment.
Why Would My Escrow Go Up?
If your property taxes go up for the year, this will cause a shortage in your escrow account. Your lender will cover this increase until your next escrow analysis with escrow credit. When your next escrow analysis is done, your monthly mortgage payment will go up to cover the amount you were short and to cover the increased tax payment for the future. It’s worth noting that most lenders complete an escrow analysis once per year. Below are the main reasons your property taxes can increase.
The value of your property can be reassessed, which can cause a change in your property taxes, and as a result, an increase in your mortgage payment.
Reassessment frequency will vary based on your county’s rules. It can be done every year or every time the property changes owners. This is something you need to check with your county and it’s something you may not have any control over.
- Tax Exemptions
Tax exemptions can cause your mortgage payment to change. If you lose a tax exemption it can cause your property taxes to go up. Depending on the state you live in, you may have to reapply for exemptions every year to ensure you are eligible to receive them. If you happen to reapply and lose your tax exemption status for property tax purposes, those taxes can go up. Usually, these amounts aren’t massive depending on your municipalities rules and regulations, but they can cause a change.
2) Homeowners Insurance
This has been a huge factor for most people during COVID-19. New constructions costs have gone up significantly during COVID due to supply chain issues and increases in timber prices. As a result, replacement costs for properties have gone up significantly.
To account for the cost of replacing your house with today’s current costs, homeowners insurance rates have gone up as much as 40% in some states. If your homeowner’s insurance rate increases, this will cause your mortgage payment to go up. Since your home insurance is escrowed, an increase in your policy premium will cause a shortage in your escrow account.
3) Mortgage Insurance Drops
Lenders require you to have mortgage insurance (PMI) on a property if you have put down less than 20%. The removal of your mortgage insurance is an instance in which your mortgage payment will go down.
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Your PMI can drop off once you have 20% equity in your home. Most lenders will auto-cancel your PMI once you hit 22% equity in your home.
If you know the value of your house has increased you can get your house reappraised. Once the lender sees that you have 20% equity in your house, your PMI will drop off. This is a positive for borrowers.
4) Interest Rate Adjustment
You have an adjustable-rate mortgage (ARM) and the interest rate has changed. As a borrower, you shouldn’t be surprised by this if you know the type of mortgage you have.
By design, adjustable-rate mortgages have a rate that starts off lower than other conventional mortgages. After some time (about 5-10 years), the rate becomes “variable” and can change every 6 months to a year. Adjustable-rate mortgages are typically given to subprime borrowers.
Once your new rate kicks in, your mortgage is re-amortized over the remainder of the loan at the new, higher rate. Your mortgage payment will fluctuate depending on how frequently your rate changes. Many people put blame on the 2008 financial crisis due to the structure of adjustable-rate mortgages.
5) Underfunded Escrow Account
An underfunded escrow account is a very common reason that can cause your payment to go up. If this occurs, it will usually happen within the first year of your new mortgage or refinance.
The main reason this happens is due to the lender underestimating or overestimating the cost of your property taxes and insurance. Sometimes the lender simply makes mistakes during the underwriting process. As such, it’s important to check your mortgage statements periodically and make sure nothing has changed.
This should be an obvious reason. Some of the main reasons people refinance their houses include:
- To take advantage of lower interest rates
- Lower their mortgage payment
- Take cash out of their equity for upgrades
- Reduce their mortgage term
If you refinance your mortgage, your mortgage payment will either increase or decrease – oftentimes, by a significant amount.
7) New Fees Charged by Your Lender
Your loan services may have charged you additional fees that increase your monthly mortgage. The good news is that your lender is required to inform you prior to additional fees getting accessed.
They will either send you some sort of letter in the mail or make it a note on your statement online.
Knowing the reasons your payment can change will keep you more informed as a borrower. COVID-19 has certainly caused major changes in our health, as well as our financial housing system.
It’s more than likely that your mortgage payment has changed due to the impact COVID-19 has had on the overall economy and knowing why your payment has changed won’t leave you with any surprises.