Can a Mortgage Go Up? Reasons Your Payment May Change
Understand how various factors can impact your mortgage payment. Learn why your monthly housing cost may adjust over time.
A mortgage payment includes principal, interest, property taxes, and homeowner’s insurance premiums, often called PITI. While principal and interest may be stable, other components can fluctuate, changing the total monthly amount. Understanding these parts helps homeowners anticipate adjustments.
Mortgage Types and Payment Changes
A mortgage loan’s structure influences whether its principal and interest payment remains constant. Fixed-rate mortgages (FRMs) have a constant interest rate for the entire loan term, typically 15 or 30 years. This ensures the principal and interest payment remains unchanged, providing predictable housing costs.
Adjustable-rate mortgages (ARMs) have an interest rate that changes periodically after an initial fixed-rate period. For example, a 5/1 ARM has a fixed rate for five years, then adjusts annually. An ARM’s new interest rate adds a fixed margin to a fluctuating financial index, such as SOFR or CMT.
These adjustments can cause the principal and interest payment to increase or decrease. ARMs include interest rate caps to protect borrowers. A periodic cap limits rate changes during an adjustment period, often by 1 or 2 percentage points. A lifetime cap sets an upper limit on the rate increase over the loan’s life, commonly 5 to 6 percentage points above the initial rate.
External Factors Affecting Payments
External factors can increase mortgage payments, even for fixed-rate mortgages. Property taxes, assessed by local governments based on real estate value, fund local services and infrastructure. Their rates can be adjusted annually or biannually by the taxing authority.
Higher property values or improvements increase assessed values and tax bills. Periodic government reassessments and changes in local tax rates also raise the tax burden.
Homeowner’s insurance premiums also influence the total mortgage payment. Insurers determine premiums based on property location, replacement cost, and claims history. Premiums can rise due to general inflation, increasing repair costs, or increased frequency/severity of claims from natural disasters.
If property taxes and homeowner’s insurance are paid via an escrow account, increases directly raise the monthly mortgage payment. Lenders collect a portion of these expenses with each payment to ensure funds are available when bills are due. Rising assessments or premiums require an increased escrow amount to cover elevated costs.
Escrow Accounts and Adjustments
An escrow account, managed by the mortgage lender, collects and disburses funds for property taxes and homeowner’s insurance premiums, ensuring timely payment. A prorated amount collected monthly accumulates funds for annual or semi-annual obligations.
Lenders conduct an annual escrow analysis to review past and project future tax and insurance expenses. This analysis compares collected amounts with disbursements. An escrow shortage occurs if expenses exceeded collections; a surplus results if more was collected.
When an escrow shortage is identified, the lender adjusts the monthly mortgage payment upwards. This covers the previous year’s shortage, often over 12 months, and projected increases in future tax and insurance costs. For example, a $300 annual tax increase and $120 shortage might raise the monthly escrow portion by $35 ($25 for tax, $10 for shortage). These adjustments reflect changes in actual tax and insurance costs, not the loan’s principal or interest rate.
Analyzing Your Mortgage Statement
Understanding your mortgage payment components helps identify reasons for changes. Statements detail amounts for principal, interest, property taxes, homeowner’s insurance, and other escrowed items like mortgage insurance.
Compare current and previous mortgage statements to identify changes. Focus on property taxes and homeowner’s insurance amounts within the escrow portion. Increases in these often indicate a higher monthly payment. Comparing statements over time highlights variable cost trends.
Lenders provide an annual escrow analysis statement explaining adjustments to your escrow account and monthly payment. These statements detail prior year disbursements, projected costs, and shortages or surpluses. Review them to understand payment changes. Cross-reference lender figures with property tax bills and insurance renewal notices to verify accuracy.