When you sign a mortgage, you might assume you’ll have a set monthly payment that will never change for as long as you’re paying off your loan. In reality, your monthly mortgage payments can change for a variety of reasons – for better and for worse.
If you’re wondering “Why did my mortgage go up?” here are some potential explanations for why your monthly home loan payments have increased – and what you can do.
Why Would My Mortgage Payment Go Up?
The nice thing about owning a home over renting one is having predictable monthly payments, since rent can generally rise once a lease ends. But there are a few reasons why your mortgage payments might increase, too.
Escrow Changes
Changes in the cost of your property taxes or homeowners insurance are among the most common causes of a mortgage payment increase. These funds are traditionally held in an escrow account connected to your mortgage payment.
Escrow accounts are helpful because they allow you to divide your property tax and homeowners insurance bills into 12 equal monthly payments, rather than paying them in a lump sum or quarterly each year. Plus, this way, your mortgage loan servicer makes those payments for you. But when your property taxes and/or homeowners insurance premiums increase, so will the amount that’s needed in your escrow account, leading to higher monthly payments.
Escrow Shortage/Overage
Local taxing authorities assess property values for tax purposes at different times. Because your taxes and insurance costs won’t always change in tandem with when your escrow is analyzed, you can end up with a shortage or overage in your escrow account.
If your property taxes or homeowners insurance costs go down, you’ll receive a check for the overage amount you paid.
With a shortage, you don’t have to worry about getting in trouble with your taxing authority or insurance company, because your mortgage lender will pay whatever amount is due on your behalf. The downside in this scenario, though, is that your monthly mortgage payment will increase.
If you’re facing an escrow shortage, you have a couple of options for dealing with it:
- You can pay off the amount of the shortage in one lump sum.
- You can spread the shortage out over the next year by having a higher monthly mortgage payment.
A large shortage can come about if you change your homeowners insurance. When you cancel your policy, you may receive a prorated refund check for the remaining time on the policy. To avoid a shortage, you must send this check to your mortgage servicer to be applied to your escrow account.
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Mortgage Refinancing
Refinancing a mortgage often leads to lower monthly payments. But in some cases, it can actually cause mortgage payments to go up.
You may decide to refinance from a 30-year loan to a 15-year loan to lower your mortgage’s interest rate and spend less money on interest in the course of repaying your home. In that case, you’ll likely see your monthly payments increase, because you’re shortening your repayment period. So even though you’re saving money on interest in the course of repaying your remaining balance, your individual payments may become higher.
You may also decide to do a cash-out refinance if you have a lot of equity in your home. With a cash-out refinance, you borrow more than your remaining mortgage balance when you sign your new loan. That could lead to higher monthly payments.
For example, let’s say you own a home worth $500,000 and owe $200,000 on your mortgage. That leaves you with $300,000 of equity.
If you need $100,000 to remodel, you may decide to do a cash-out refinance for $300,000. Of that, $200,000 will go toward paying off your initial mortgage, and the other $100,000 is money you can use for home improvements. But because you’re increasing your overall loan amount, your monthly payments may rise.
To be clear, a cash-out refinance won’t always cause your monthly payments to rise. If you take a small amount of cash out of your home and you manage to lock in a much lower interest rate on your refinance, you may find that your monthly payments stay the same or even decrease.
But if you do a cash-out refinance at the same interest rate as your existing home loan, then you should expect your payments to go up. That’s because you’re borrowing more money at the same rate.
ARM Adjustments
If you have an adjustable-rate mortgage (ARM), this could be the reason – or one of multiple reasons – your mortgage keeps going up. All ARMs start with an initial rate at the start of the loan. But unlike with a fixed-rate mortgage, that initial rate will change after a certain number of years.
If you have a 7-year ARM, for example, your payment is going to stay fixed at the initial rate for 7 years. This ARM payment option would be marketed as a 7/6 ARM. The second number refers to how often the rate adjusts at the end of the fixed period. In this case, the rate adjusts every 6 months.
Sometimes starting off with an ARM can give you lower monthly mortgage payments initially. If you don’t want your payments to go up, you may want to refinance out of an ARM and into a fixed-rate mortgage before your payments can adjust upward.
That said, you should know that with an ARM it’s possible for your monthly payments to decrease once your initial rate is subject to adjustments. So in some cases, sticking with an ARM after that initial period could work to your advantage.
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FAQ: Why Did My Mortgage Go Up?
Let’s take a look at a few frequently asked questions about why your mortgage payment is going up or may increase in the future.
Similarly, your homeowners insurance costs could rise for a number of reasons. If you file several claims, or there are many claims filed in your area, your insurer may opt to raise your premiums. You may also find that your premiums increase if you switch insurers. This could also result in having to make higher escrow payments.
Similarly, if your homeowners insurance company decides to increase your premium rates, you can shop around for different insurance and see if that helps you avoid higher payments.
The Bottom Line: Your Mortgage Payment Can Go Up Over Time
It’s a big misconception that once you sign a fixed-rate mortgage, you’re guaranteed to have the same monthly payments until you own your home debt-free. As you can see, there are a number of reasons why your mortgage payment could go up over time.
That’s why it’s important to build some wiggle room into your budget for housing payments. If you’re currently spending $1,500 a month on your mortgage payment now, remind yourself there’s a chance your mortgage payments could be $1,550 next year, or $1,600 the year after. Then make sure not to max out your remaining paycheck on non-mortgage expenses in case that happens.
Better yet, when shopping for a home, you may want to choose one that’s not at the very top of your budget. That way, if your mortgage payments do end up increasing over time, it may not be such a big financial blow.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
