When you get a mortgage, it’s common to think you make a set payment every month. It just continues that way for 30 years until you finally pay the loan off, right?
That’s not always the case. With a fixed-rate mortgage, your principal and interest payment may not change, but if you have an adjustable rate mortgage (ARM), the rate changes after a certain number of years.
There are other common reasons a mortgage payment can change. In this article, we’ll go over these reasons so you’re not surprised when they come up. We’ll let you know how to keep track of possible changes and how to plan for them.
Changes in your property taxes or homeowners insurance are one of the most common reasons for a mortgage payment increase. These funds are held in an escrow account included with your mortgage payment. Sometimes, escrow accounts are required by mortgage investors.
Escrow accounts are helpful because they allow you to split your tax and insurance bills into 12 equal monthly payments rather than paying for them in a lump sum every year. When your property taxes and/or homeowners insurance increase, so does the amount in escrow.
Local taxing authorities assess property values for tax purposes at different times. Because your taxes and insurance costs won’t always change at the same time that your escrow is analyzed, you may 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. Dealing with a shortage is slightly different. First, you don’t have to worry about getting in trouble with your taxing authority or insurance company, because whatever amount is due, your mortgage lender will pay it in your stead. Of course, this also means 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 escrow amount.
A large shortage can happen if you change your homeowners insurance. When you cancel your policy, you’ll 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.
Stay on top of your escrow payments to avoid surprise changes in your mortgage. See the direction that your escrow account has been trending to plan and make adjustments if necessary.
Remember that paying more in property taxes can be a good thing. This often means your property is increasing in value.
Mortgage Insurance Removal
Once upon a time, you had to make a 20% down payment in order to purchase a home. That’s no longer the case, as there are now a number of low down payment options. But they often come with a caveat. In exchange for a down payment option as low as 3%, for instance, you’ll most likely have to pay mortgage insurance.
This will make your monthly mortgage payment go up. If you reach a certain amount of equity or your mortgage insurance has been paid for a certain amount of time, you may not have to pay it anymore. This leads to a lower monthly payment amount.
USDA loans have mortgage insurance that can’t be removed, but FHA and conventional loans have different guidelines. Keep in mind that mortgage insurance is not the same as mortgage protection insurance (MPI), which is a policy that ensures mortgage payments continue to be made to the lender in the instance that a homeowner dies.
Removing FHA MIP
If you have an FHA loan that closed on or after June 3, 2013, you can only remove the mortgage insurance premium(MIP) if you’ve made a down payment of 10% or more and paid mortgage insurance for at least 11 years. If your down payment is lower than that, it won’t be removed for the life of the loan.
If your loan closed before that date, the requirements work differently. MIP can be removed when you reach 22% equity in your home. However, this is subject to certain timeframe restrictions. If you no longer pay for mortgage insurance premiums, your monthly payment will decrease.
If you wish to stop paying mortgage insurance premiums, but they can’t be removed, look into refinancing into a conventional loan. With a conventional loan, you wouldn’t pay mortgage insurance as long as you held 20% equity.
Removing Conventional PMI
If you pay for private mortgage insurance (PMI), it can be removed once you reach 20% equity in your home. In the majority of cases, this is going to require an appraisal to determine the property hasn’t lost value.
There are instances where more equity is required to cancel mortgage insurance on a conventional loan. You can find out more info about this on the Rocket Mortgage® servicing page.
Service Member Benefits
Those serving in the Armed Forces keep us safe every day The government doesn’t want their mortgages to cause them any more stress than they already deal with daily. That’s where the Service Members Civil Relief Act (SCRA) comes in.
The SCRA covers service members from the date they enter an active duty cycle until one year following the end of an active duty assignment. During this period, those on active duty are entitled to certain protections, including:
- No requirement to pay late fees
- Your lender can’t foreclose on you
- An interest rate limited to 6% during active duty service
Unlike some other lenders, Quicken Loans® automatically enrolls clients on active duty into the program for SCRA protection through a partnership with the federal government. If you’re going on the program during active duty, your payment will decrease if your interest rate is above 6%. When coming off the program a year following your active service, your payment increases to your contractual interest rate if it’s above 6%.
If you set up automatic payments through your Rocket Mortgage servicing account, it will adjust to whatever the new mortgage payment amount is. This includes adding any additional payments toward principal that you were making before the change.
Another common way that your mortgage payment can change is if you have an adjustable rate. It’s kind of in the name. But how do adjustable rate mortgages (ARMs) work? All ARMs start with an initial rate on the front of the loan.
If you have a 7-year ARM, your payment is going to stay fixed at the initial rate for seven years. This ARM payment option would be marketed as a 7/6 ARM. The second number refers to how many times per year the rate adjusts at the end of the fixed period. In this case, the rate adjusts every six months.
When it’s time for your ARM to adjust, it goes up or down based on a couple of indexes, depending on the investor in your mortgage. If you have a conventional loan through Fannie Mae or Freddie Mac, your interest rate is adjusted based on the six-month Secured Overnight Financing Rate (SOFR). If you have an FHA or VA mortgage, your interest rate adjustment is based on the one-year Constant Maturity Treasury (CMT). This index number is then added to a margin to get your rate.
Additionally, there are caps associated with your loan. For instance, you might see one labeled as 2/1/5, which means:
- 2: There is a 2% increase/decrease cap on the initial adjustment.
- 1: The rate won’t go increase/decrease more than 1% each adjustment after that.
- 5: The rate won’t go increase/decrease more than 5% for the life of the loan.
Find Your Best Mortgage Option
There are many reasons why your mortgage might increase. Keeping track of them all can be a challenge. If you own your home and aren’t keen on your mortgage payment changing every year, try to refinance into a fixed-rate mortgage before your payment changes.
Our mortgage calculators can help you decide what your best option is. You can also check out your Rocket Mortgage servicing account to keep up with any important information for your mortgage, including payment changes.
And, if you have any pressing questions, don’t hesitate to speak to a mortgage specialist.