Can a Mortgage Company Raise Your Payment?
Is your mortgage payment changing? Understand the common reasons behind adjustments and how to effectively manage them.
A typical mortgage payment encompasses several distinct components that collectively form the monthly amount due. These usually include principal, interest, property taxes, and homeowner’s insurance, often referred to by the acronym PITI. The principal portion reduces the outstanding loan balance, while the interest is the cost of borrowing the money. Property taxes contribute to local government services, and homeowner’s insurance protects the property against damage. While many homeowners might assume their mortgage payment remains constant over time, various elements can lead to adjustments in this monthly obligation.
Adjustments from Loan Terms
The structure of a mortgage loan can directly influence whether monthly payments remain consistent or fluctuate. Fixed-rate mortgages maintain the same principal and interest payment throughout the loan term, providing predictable housing costs for these components. In contrast, Adjustable-Rate Mortgages (ARMs) feature an interest rate that can change periodically after an initial fixed period. This variability means the interest portion of the payment, and consequently the total monthly payment, can increase or decrease.
ARMs typically begin with a fixed interest rate for a set number of years, such as 3, 5, 7, or 10 years. After this initial period, the interest rate adjusts at predetermined intervals, often annually. These adjustments are tied to a specific financial index, like the Secured Overnight Financing Rate (SOFR), plus a fixed margin set by the lender. For example, if the index rate rises, the interest rate on the ARM will also likely increase, leading to a higher monthly payment.
Conversely, if the index rate decreases, the ARM’s interest rate and subsequent payment could fall. Most ARMs include caps that limit how much the interest rate can change during each adjustment period and over the life of the loan. These caps provide some protection against extreme payment increases, but significant changes in the underlying index can still result in noticeable payment shifts. Understanding the initial fixed period, adjustment frequency, chosen index, and applicable caps is essential for borrowers with ARMs.
Escrow Account Revisions
A mortgage escrow account is a dedicated holding account managed by the mortgage servicer to collect and disburse funds for specific property-related expenses. These typically include property taxes and homeowner’s insurance premiums. Homeowners contribute a portion of these anticipated annual costs with each monthly mortgage payment, and the servicer holds these funds until the bills are due, then pays them on the homeowner’s behalf.
Mortgage servicers conduct an annual escrow analysis to ensure sufficient funds are collected to cover upcoming tax and insurance obligations. During this analysis, the servicer reviews the actual disbursements made in the past year and projects the costs for the next 12 months. If property tax assessments increase due to rising property values or changes in local tax rates, the required monthly escrow contribution will also rise. Similarly, if homeowner’s insurance premiums go up, the amount needed in escrow will adjust accordingly.
An escrow shortage can occur if the amount collected over the past year was less than the actual expenses paid out. This often happens when property taxes or insurance premiums increase unexpectedly. When a shortage is identified, the servicer typically requires the homeowner to repay the deficit, often by adding a prorated amount to the monthly mortgage payment over the next 12 months. This repayment, combined with the higher ongoing contributions for increased taxes and insurance, directly leads to a higher total monthly mortgage payment.
Other Factors Affecting Payments
Beyond changes related to loan terms or escrow accounts, other less common circumstances can cause a mortgage payment to increase. A formal loan modification, for instance, can alter the payment amount. This occurs when a borrower and lender agree to change the original terms of the mortgage, potentially adjusting the interest rate, loan term, or even the principal balance to make payments more manageable. Such modifications result in a new, agreed-upon monthly payment.
When a homeowner’s insurance policy lapses due to non-payment or cancellation, the mortgage servicer may obtain force-placed insurance to protect their financial interest in the property. This type of insurance is typically much more expensive than a standard homeowner’s policy, and its cost is added to the monthly mortgage payment, significantly increasing the total amount due. It is a protective measure for the lender, but it comes at a higher cost to the borrower.
Accumulated late fees or other servicer-imposed charges can sometimes be added to the regular monthly payment, particularly if the borrower has a history of missed or partial payments. While these charges are usually separate, a servicer might demand their inclusion in the regular payment to clear the outstanding balance. For properties within homeowners’ associations (HOAs) or planned unit developments (PUDs), special assessments levied by the association might also be collected through the mortgage servicer if an agreement is in place, thereby increasing the monthly payment.
Responding to Payment Changes
Upon receiving notification of a mortgage payment change, carefully reviewing the notice is the initial step. This document, often an annual escrow analysis statement or an adjustable-rate mortgage adjustment notice, outlines the effective date of the change, the reason for the adjustment, the new total payment amount, and a detailed breakdown of each component. Understanding these specifics helps clarify the cause of the payment alteration.
Contacting the mortgage servicer directly for clarification is advisable if any part of the notice is unclear. Homeowners should inquire about how the new payment amount was calculated and request a detailed breakdown of all changes to property taxes, insurance premiums, or interest rates. Many servicers offer online portals or dedicated customer service lines to assist with such inquiries.
Requesting supporting documentation, such as the full escrow analysis statement or the ARM adjustment history, can provide further insight. This allows homeowners to verify the figures presented in the notice against their own records or public information. For instance, property tax assessments can often be checked through local government websites, and insurance policy details can be confirmed with the insurance provider.
If an error is suspected in the calculation or the underlying data, the homeowner has the right to dispute the payment change. This typically involves submitting a written letter to the servicer detailing the perceived error and providing supporting evidence. Maintaining thorough documentation of all communications, including dates, names of representatives, and summaries of conversations, is important throughout this process.