Why Did My Mortgage Payment Increase?

An unexpected increase in your monthly mortgage payment can be unsettling. Understanding the factors that contribute to these fluctuations is the first step in addressing these financial shifts. While a mortgage payment might seem fixed, various components can lead to its adjustment over time.

Fluctuations in Your Interest Rate

A primary reason for changes in mortgage payments stems from fluctuations in the interest rate, particularly for those with an Adjustable-Rate Mortgage (ARM). An ARM features an interest rate that changes periodically based on market conditions, unlike a fixed-rate mortgage where the interest rate remains constant. The interest rate on an ARM is typically tied to a specific financial index, such as the Secured Overnight Financing Rate (SOFR) or the Constant Maturity Treasury (CMT), plus a margin.

After an initial fixed-rate period (which can range from three to ten years), the ARM’s interest rate will reset at regular intervals, often annually or every six months. If the chosen index has risen when this reset occurs, your interest rate and monthly payment will increase. To protect borrowers from extreme rate changes, ARMs include caps that limit how much the interest rate can adjust.

These caps include an initial adjustment cap, periodic caps (which restrict how much the rate can change from one adjustment period to the next), and a lifetime cap (setting the maximum interest rate over the entire loan term). For instance, a 5/1 ARM with a 5/2/5 cap structure means the initial fixed rate lasts five years, the rate can adjust by a maximum of 2 percentage points annually thereafter, and the total increase over the loan’s life cannot exceed 5 percentage points from the original rate.

Increases in Property Taxes

Property taxes represent another common reason for an increase in your monthly mortgage payment. These taxes are assessed by local governments and fund public services such as schools, police, and road maintenance. The amount of property tax is generally determined by multiplying your home’s assessed value by the local tax rate, often expressed as a millage rate, which signifies the amount of tax per thousand dollars of assessed property value.

Property taxes can increase due to a rise in your property’s assessed value from market appreciation or home improvements. Local tax rates (millage rates) can also change if local governments need to raise more revenue. If your mortgage includes an escrow account for property taxes, any increase in these taxes will directly lead to a higher monthly mortgage payment. The mortgage servicer pays these taxes on your behalf from the escrow account.

Increases in Homeowner’s Insurance Premiums

Homeowner’s insurance premiums are another component of your mortgage payment that can increase. These premiums can rise due to various factors, reflecting an insurer’s assessment of risk and the cost of potential claims. One significant factor is the increased cost of repairs and building materials, which directly impacts rebuilding or repair costs. Supply chain issues and labor shortages can also drive up these costs.

Higher claims frequency in a specific area, often driven by natural disasters like hurricanes, floods, or wildfires, can lead to widespread premium increases. Even if your home is not directly affected, increased claims elsewhere can affect reinsurance costs, which insurers pass on to policyholders. Other factors contributing to rising premiums include your home’s age and condition, your claims history, and broader inflationary pressures. If your mortgage includes an escrow account for homeowner’s insurance, any premium increase will necessitate a larger monthly contribution.

Escrow Account Reconciliations

Many mortgage payments include an escrow account, which serves as a holding place for funds collected by your lender to cover property taxes and homeowner’s insurance premiums. Each year, your mortgage servicer conducts an annual escrow analysis to ensure sufficient funds to pay these expenses. This analysis reviews actual costs paid out in the previous year against amounts collected, and projects anticipated costs for the upcoming 12 months.

An increase in your mortgage payment can occur if the escrow account experienced a “shortage” in the prior year. A shortage means the lender paid out more for your taxes and insurance than collected through monthly escrow contributions. This often happens when property taxes or insurance premiums increase unexpectedly, making the previous year’s estimated collection insufficient. To address this shortage, the new monthly mortgage payment will be adjusted to cover projected higher costs for the upcoming year and include an amount to amortize the past year’s shortage, typically spread over the next 12 months.