Why Has My Mortgage Payment Gone Up?

It can be unsettling to discover your monthly mortgage payment has increased unexpectedly. Many homeowners experience this surprise, which often leads to confusion about the reasons behind the change. While the principal and interest portion of a fixed-rate mortgage typically remains constant, other factors can cause your total monthly payment to fluctuate. Understanding these reasons can help you anticipate and manage your housing expenses.

Understanding Adjustable-Rate Mortgages

An Adjustable-Rate Mortgage, or ARM, is a home loan where the interest rate can change periodically over the loan’s term. Unlike a fixed-rate mortgage, which maintains the same interest rate throughout its life, an ARM’s rate is tied to a financial index and adjusts at predetermined intervals. This means your monthly payments can either increase or decrease, depending on market conditions.

The interest rate on an ARM is determined by adding a fixed percentage, known as the margin, to a fluctuating index rate. The index is a benchmark interest rate that moves with the broader market, such as the Secured Overnight Financing Rate (SOFR) or a U.S. Treasury security rate. The margin, however, remains constant throughout the life of the loan and is set at the time of loan origination. For example, if the index is 4.0% and the margin is 2.5%, your interest rate would be 6.5%. If the index rises to 4.5%, your rate would then become 7.0%.

ARMs are often described with two numbers, such as a 5/1 ARM or a 7/1 ARM. The first number indicates the duration, in years, of an initial fixed-rate period during which the interest rate does not change. For instance, a 5/1 ARM has a fixed rate for the first five years, while a 7/1 ARM has a fixed rate for the first seven years. The second number indicates how often the interest rate will adjust after the initial fixed period concludes, typically once per year. So, with a 5/1 ARM, after the initial five years, the rate will adjust annually for the remainder of the loan term.

A rate increase on an ARM directly leads to a higher monthly mortgage payment as the interest portion recalculates based on the new rate. Most ARMs include rate caps that limit how much the interest rate can change during each adjustment period and over the loan’s lifetime, providing some protection. Lenders are required to send borrowers a Notice of Interest Rate Adjustment before an adjustment, typically two to eight months in advance, detailing the old and new rates, the index and margin, and the updated monthly payment.

Changes in Escrow Account Components

Many mortgage payments include an amount collected for an escrow account. This account is set up by your lender to hold funds for property taxes and homeowner’s insurance premiums. Instead of paying these bills directly, your lender collects a portion of the estimated annual costs with each monthly payment. The lender then uses these funds to pay your property tax bills and insurance premiums on your behalf when due.

Increases in property tax assessments or local tax rates can directly lead to a higher monthly mortgage payment. Property taxes are generally calculated based on the assessed value of your home, and this value can rise due to overall market appreciation, improvements you make to your property, or decisions by local governments to increase tax rates. When your property tax liability increases, the amount your lender needs to collect for your escrow account also rises to ensure enough funds are available to cover the new, higher tax bill.

Similarly, increases in homeowner’s insurance premiums can cause your mortgage payment to go up. Insurance companies may raise premiums due to various factors, including inflation, an increase in claims in your area, or rising costs to repair or rebuild homes. Since your lender typically requires you to maintain homeowner’s insurance to protect their investment, any increase in your premium means a larger amount must be collected into your escrow account each month.

Your lender performs an annual escrow analysis to review the funds collected and disbursed from your account. This analysis compares actual taxes and insurance paid with amounts collected, and projects anticipated costs for the upcoming year. If the analysis reveals a shortage, your lender will adjust your monthly escrow contribution upward to make up the difference and ensure sufficient funds for future payments. This adjustment will be summarized in an annual escrow analysis statement from your servicer.

Other Less Common Reasons

While adjustable-rate mortgages and escrow changes are common reasons for payment increases, other situations can also lead to a higher mortgage bill. A loan modification, for instance, might result in a higher monthly payment if a homeowner worked with their lender to modify terms due to financial hardship. Changes to the loan’s interest rate or term as part of the modification agreement could lead to this outcome.

Specific, localized assessments can also impact your property tax bill, and by extension, your mortgage payment. These assessments are often levied by local authorities for public improvements that benefit specific properties, such as new sidewalks, sewer systems, or streetlights. Such special assessments are added to property tax bills and, if your taxes are paid through escrow, will necessitate an increase in your monthly escrow contribution.

A mortgage payment increase could also be the result of a lender error. Review your monthly mortgage statements and notices from your servicer. If you suspect a discrepancy or do not understand a payment change, contact your mortgage servicer directly for clarification and a detailed explanation. Keep a record of all correspondence.