Can a Bank Raise Your Mortgage? What Homeowners Should Know

A mortgage represents a significant financial commitment for homeowners, typically spanning decades. While a bank cannot arbitrarily raise your interest rate on a fixed-rate loan, other elements of your total payment, or the interest rate itself on different loan structures, are subject to adjustments. Changes can occur due to predefined loan terms or fluctuations in related housing costs.

How Your Mortgage Interest Rate Can Change

The interest rate on your mortgage determines your monthly principal and interest payment. For many homeowners, a fixed-rate mortgage provides predictability, as the interest rate remains the same for the entire duration of the loan. With this type of mortgage, the principal and interest portion of your payment will not change, offering stability regardless of market interest rate fluctuations.

In contrast, adjustable-rate mortgages (ARMs) are designed to have an interest rate that can change periodically. These loans typically begin with an introductory fixed-rate period, which can last for a set number of years, commonly three, five, seven, or ten years. During this initial phase, the interest rate remains constant, providing predictable payments. After this fixed period concludes, the interest rate begins to adjust at predetermined intervals, often annually or semi-annually, for the remainder of the loan term.

The interest rate for an ARM after the fixed period is determined by adding a fixed percentage, known as the margin, to a fluctuating financial benchmark, called an index. Common indices include the Secured Overnight Financing Rate (SOFR) or a Treasury yield. The margin is established at the time of loan origination and does not change throughout the loan’s life, representing the lender’s profit. Therefore, if the chosen index rises, your interest rate and corresponding monthly payment will likely increase, but if the index falls, your rate could decrease.

To protect borrowers from extreme interest rate swings, ARMs include various caps that limit how much the rate can change. An initial adjustment cap restricts the first rate change after the fixed period, typically to two or five percentage points above or below the initial rate. Periodic caps limit how much the interest rate can increase or decrease during subsequent adjustment periods, often one or two percentage points. A lifetime cap sets the maximum overall interest rate that can be charged over the entire life of the loan, commonly five or six percentage points above the initial rate.

Other Factors That Impact Your Monthly Payment

Beyond the interest rate, several other components contribute to your total monthly mortgage payment, and these can fluctuate, leading to an overall increase. One common reason for payment changes stems from adjustments to your escrow account. An escrow account is typically maintained by your mortgage servicer to collect funds for property taxes and homeowner’s insurance premiums, paying these expenses on your behalf when they are due.

Mortgage servicers typically conduct an annual escrow analysis to ensure sufficient funds are collected for anticipated costs. If property taxes increase due to reassessments or new local levies, the amount required in your escrow account will rise. Similarly, homeowner’s insurance premiums can increase due to factors like inflation or rising repair costs. When the annual analysis reveals a shortfall or projected increase in these expenses, your monthly escrow contribution, and thus your total mortgage payment, will be adjusted upward to cover the difference.

Private Mortgage Insurance (PMI) is another factor that can affect your monthly payment, especially for conventional loans where the down payment is less than 20% of the home’s purchase price. PMI protects the lender against financial loss if a borrower defaults on the loan. While PMI is an additional cost included in your monthly payment, it is not a permanent expense. PMI can be removed once you have accumulated 20% equity in your home, or it may be automatically cancelled by the lender once your loan balance reaches 78% of the home’s original value.

Other, less frequent factors can also impact your monthly payment. These might include contractually agreed-upon fees or charges that become applicable under specific circumstances, such as late payment fees. However, these are avoidable and represent a smaller portion of the overall payment compared to changes in escrow or interest rates.

Steps to Take If Your Payment Increases

If you notice an increase in your monthly mortgage payment, the first step is to carefully review your mortgage statements. Your servicer is required to provide an annual escrow analysis statement, which details the past year’s transactions and projections for the upcoming year, explaining any changes to your escrow portion. Examine this statement for specific reasons behind the increase, such as higher property taxes or homeowner’s insurance premiums. This documentation will provide insight into which component of your payment has changed.

After reviewing your statements, contact your mortgage servicer directly to seek clarification. They can explain the specific reasons for the payment increase and help you understand the calculations. This direct communication can help resolve any potential misunderstandings or errors.

For homeowners with adjustable-rate mortgages, exploring refinancing options could be beneficial if interest rates have decreased significantly since your last adjustment. Refinancing involves obtaining a new loan to pay off your current mortgage, potentially securing a lower interest rate or switching to a fixed-rate loan for greater stability. However, consider the closing costs associated with refinancing, which can range from 2% to 5% of the loan amount, to determine if it is a financially sound decision.

If the payment increase is due to financial hardship, a loan modification might be an option. A loan modification is a change to the original terms of your mortgage, such as extending the loan term or reducing the interest rate, designed to make your payments more affordable. This process is typically pursued in situations where homeowners face significant difficulty meeting their current mortgage obligations. Your servicer can provide information on eligibility for such programs.

Challenging Property Taxes

Should the increase be primarily due to higher property taxes, you may have the right to challenge your property tax assessment. This process typically involves appealing to your local tax assessor’s office and presenting evidence that your home’s assessed value is too high compared to comparable properties. While the specific process varies by jurisdiction, it can potentially lead to a reduction in your property tax burden.

Shopping for Homeowner’s Insurance

If homeowner’s insurance premiums are the cause, consider shopping around for new insurance policies from different providers. Obtaining quotes from multiple insurers can help you find more competitive rates for comparable coverage, potentially reducing that portion of your monthly payment.