Suddenly, there comes a month when your mortgage payment has gone up. What’s the deal? Here are the biggest reasons your mortgage payments change.
Property Tax Changes
Your property taxes going up or down can cause a mortgage payment change. Most people pay their taxes and insurance into an escrow account. Escrow accounts are helpful because they mean you don’t have to pay your entire tax bill in one shot. Instead, your taxes are spread out in equal payments over the course of the year.
If there’s a shortage in your account because of a tax increase, your lender will cover the shortage until your next escrow analysis. When your analysis takes place, your monthly payment will go up in order to cover the time you were short and to cover the increased tax payment going forward. Your mortgage servicer only does an escrow analysis once a year, and it won’t necessarily be the same time that your property tax is evaluated.
Some good news is that your tax payments will only change in certain situations.
Occasionally, your property value will be reassessed, and this will cause a change in your taxes that may cause your mortgage payment to go up or down.
Different locations have different requirements for how often property value is reassessed. It could be once every year or two, or a city may choose to reassess only when a house changes owners.
The loss of tax exemptions can also drive your mortgage payment up. Some states and municipalities require that you reapply for your exemptions every year.
This aspect of your property taxes may also cause confusion if you’ve gotten a tax bill estimate from the previous homeowner. They may qualify for exemptions that you don’t and vice versa.
If you have a mortgage, you’re required to have homeowners insurance. It protects both you and your lender against damage to your house. If you don’t have a current policy or yours has expired, your lender may find one for you.
If your lender finds the insurance, it may be more expensive than it would be if you shopped around for your own policy. This can cause your mortgage payment to increase.
A shortage can occur in your escrow account if you change homeowners insurance policies, and your lender has to make unanticipated payouts. This may also happen if there are increases in the cost of premiums, even if you have the same insurance carrier.
Adding an Escrow Account
As a homeowner, you sometimes have the option of choosing to have an escrow account or making your tax and insurance payments on your own when they come due. You may choose to have an escrow account added at some point over the term of your mortgage so you can stop making lump sum payments.
Adding an escrow account will increase your mortgage payment, in order to cover your monthly tax and insurance payments. You’ll also have to put in a little bit extra upfront in order to set up the account. The good news is that it won’t be more than one-sixth of your total escrow expenditures for the year.
If you miss a tax or insurance payment, your state or local government may choose to initiate a foreclosure or impose fines. To avoid this, a lender or servicer may require that an escrow account gets set up following a missed payment, to make sure the payments are made going forward.
Your mortgage payment also changes after a certain period if you have an adjustable rate mortgage (ARM).
ARMs have a rate that’s generally lower than comparable fixed rates. After some time (usually 5 or 10 years), the rate becomes variable and changes once a year, riding the seesaw movements in the global financial markets. Your mortgage is then re-amortized over the remainder of the loan term at the new rate.
Your mortgage payment will go up or down with the rate change. It’s important to note that there are limits to how much your rate can go up from the initial rate you were given.
Do you have any questions about mortgage payment changes? Let us know in the comments.
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