Why Is My Mortgage Payment Increasing?

It can be surprising and concerning for homeowners to discover their monthly mortgage payment has increased. While a fixed-rate mortgage’s principal and interest portion generally remains stable, other elements can cause the total payment to fluctuate. Understanding the underlying reasons for these changes is important for managing personal finances effectively.

Your Adjustable Interest Rate

An adjustable-rate mortgage (ARM) can significantly impact your monthly payment due to its variable interest rate. Unlike a fixed-rate mortgage, an ARM’s rate changes periodically. This means your monthly payments may go up or down over time, depending on market conditions.

ARMs typically begin with a fixed-rate period, during which the interest rate remains constant. This initial period can range from six months to 10 years. Once this introductory period ends, the interest rate begins to adjust at regular intervals, often every six or 12 months.

The adjusted interest rate is determined by adding a margin to an underlying financial index. Common indices include the Secured Overnight Financing Rate (SOFR) or the Prime Rate. If the chosen index rises, your ARM’s interest rate will likely increase, leading to a higher monthly payment. The Prime Rate, for instance, is often tied to the federal funds rate and can change based on decisions made by the nation’s largest banks.

To protect borrowers from sharp increases, ARMs include interest rate caps. These caps limit how much the interest rate can change at different points in the loan’s life. There are typically three types of caps: an initial adjustment cap, a periodic cap, and a lifetime cap. Borrowers can find details about their loan type, adjustment schedule, and rate caps in their original loan documents or on their monthly mortgage statements.

Changes to Your Escrow Account

Fluctuations in your mortgage payment often stem from changes in your escrow account. This account, set up by your lender, collects funds for property taxes and homeowner’s insurance premiums. Lenders require it to ensure these expenses are paid on time, protecting their investment.

Each month, a portion of your mortgage payment goes into this escrow account, alongside principal and interest. This amount estimates your annual property taxes and insurance premiums, which your mortgage servicer uses to pay bills on your behalf.

Increases in local property taxes commonly cause escrow adjustments. If your property’s assessed value rises or the local tax rate increases, your annual property tax bill will go up, requiring a higher monthly escrow contribution.

Similarly, higher homeowner’s insurance premiums also lead to increased escrow payments. Insurance costs can rise due to inflation, increased rebuild costs, past claims, or broader market changes. Your insurance provider notifies you of premium adjustments, and your lender adjusts your escrow collection.

Mortgage servicers conduct an annual escrow analysis to review activity and project future costs. If a shortage is found, your servicer will increase your monthly mortgage payment to cover the previous year’s shortage and anticipated higher costs for the upcoming year.

Other Possible Reasons

Beyond adjustable interest rates and escrow account changes, other specific loan features can lead to an increase in your mortgage payment. These situations, while less common for a standard fixed-rate loan, are built into the structure of certain mortgage products.

Interest-Only Mortgages

Some loan products, known as interest-only mortgages, feature an initial period where monthly payments cover only the interest accrued on the loan balance. During this time, no portion of the payment goes towards reducing the principal amount owed.

When this interest-only period concludes, the loan typically converts to a fully amortizing payment schedule, requiring payments of both principal and interest. This transition results in a significant increase in the monthly payment as the borrower begins to repay the original loan amount.

Negative Amortization

Negative amortization occurs when your monthly mortgage payment is less than the interest that accrues on the loan. In such cases, the unpaid interest is added to the principal balance of your loan, causing your total debt to increase rather than decrease.

While this feature might offer lower payments initially, it means you end up owing more than you originally borrowed. This can lead to much higher payments later when the loan begins to amortize fully.

Loan Modifications

If a homeowner has undergone a loan modification due to financial hardship, the new terms of the agreement could result in an increased payment. While modifications are often designed to make payments more affordable, certain adjustments might lead to a higher monthly obligation compared to what was paid during a temporary relief period or even the original payment.