Can Your Mortgage Go Up on a Fixed-Rate?

A fixed-rate mortgage is a home loan where the interest rate remains constant for the entire duration of the loan term. While the interest rate itself is fixed, the total monthly payment can still fluctuate due to other components that make up the complete mortgage obligation.

The Fixed Components of Your Payment

The core of a fixed-rate mortgage payment consists of principal and interest (P&I), which remains stable throughout the life of the loan. This stability allows borrowers to budget for this significant portion of their housing expense. The principal is the amount borrowed, while interest is the cost of borrowing that money.

Each monthly payment contributes to both the principal balance and the interest owed, following a predetermined amortization schedule. Amortization is the process of gradually paying off a debt over a set period through regular, consistent payments. In the early years, a larger portion of each payment typically goes towards interest, with a smaller amount reducing the principal. As the loan matures, more of each payment is applied to the principal, accelerating the reduction of the outstanding debt.

Variable Components in Your Monthly Payment

Even with a fixed interest rate, several other elements of your mortgage payment can change, leading to adjustments in your total monthly obligation. These variable components often include property taxes, homeowner’s insurance, private mortgage insurance, and in some cases, homeowners association dues.

Property taxes are levied by local governments and are used to fund public services. The amount you pay can change based on your home’s assessed value, which may increase due to market appreciation or improvements. Changes in tax rates can also lead to higher or lower property tax bills. If your property taxes increase, your monthly mortgage payment will also rise.

Homeowner’s insurance (HOI) protects your home and personal property against damage from events like fire, storms, or theft. Premiums can fluctuate annually due to factors like inflation affecting rebuilding costs, changes in the property’s risk profile, or your claims history. The age of your home, its construction materials, and features can also influence your premium. An increase in your HOI premium will be reflected in a higher monthly mortgage payment.

Private Mortgage Insurance (PMI) is typically required if your down payment on a conventional loan is less than 20% of the home’s purchase price. This insurance protects the lender if you default on the loan, not the homeowner. While PMI is usually paid monthly, it is not a permanent expense. You can often request its cancellation once your loan balance reaches 80% of your home’s original value, or it will automatically terminate when the balance drops to 78% of the original value, assuming you are current on payments. This removal of PMI will reduce your overall monthly payment.

Homeowners Association (HOA) dues are regular fees paid by residents in certain planned communities or condominiums to cover the maintenance and operation of common areas and shared amenities. While HOA dues are often paid directly by the homeowner, they can sometimes be included in the monthly mortgage payment if managed through an escrow account. HOA fees typically increase annually to keep pace with rising maintenance costs, unexpected repairs, and inflation. These increases, if included in your mortgage payment, would contribute to its variability.

How Escrow Accounts Impact Your Payment

The primary mechanism through which these variable costs affect your overall monthly mortgage payment is the escrow account. An escrow account is managed by your mortgage lender or servicer to collect and pay property taxes and insurance premiums on your behalf. This ensures these important bills are paid on time, protecting both the homeowner and the lender’s investment.

Lenders estimate the annual cost of property taxes and insurance and divide this total by twelve, adding that amount to your regular monthly principal and interest payment. Lenders are permitted to collect a small cushion to cover any unexpected increases, which helps prevent shortages.

Your lender performs an annual escrow analysis to review the account’s activity. During this review, the lender compares actual amounts disbursed for taxes and insurance with amounts collected. They also project anticipated costs for the upcoming 12 months to determine if your current monthly escrow payment is sufficient.

Two main outcomes can result from an escrow analysis. An escrow shortage occurs if actual expenses were higher than amounts collected, or if projections indicate a need for more funds. If a shortage is identified, the homeowner typically has the option to pay the deficit as a lump sum or have the amount spread out and added to their monthly mortgage payments over the next 12 months.

Conversely, an escrow surplus happens when the money collected exceeds the amount needed. If a surplus is found, the homeowner may receive a refund check. If the surplus is smaller, it might be applied as a credit to reduce future monthly escrow payments. These annual adjustments are the primary reason why a fixed-rate mortgage payment can still change, even though the interest rate remains constant.