It can be an unpleasant surprise to open your monthly mortgage statement and see a higher amount due than you expected. To understand why your payment increased, take a look at the components of a mortgage payment that might change.
[A Guide to Seller-Paid Mortgage Rate Buydowns]
Why Did My Mortgage Payment Go Up?
If you’re facing a higher mortgage payment, one or more of the following reasons might be the culprit.
Rate Adjustment
Your payment might go up if you have an adjustable-rate mortgage. Once the loan’s introductory period is over, your interest rate adjusts at specific intervals (usually every six or 12 months) following the economic index it’s tied to.
Suppose you have a 3/1 adjustable-rate mortgage. The “3/1” means your interest rate is fixed for three years, then changes once a year. If interest rates in the broader economy have risen, so likely will the rate you’re paying on your home loan and push your monthly payment up.
Property Tax Increase
Mortgage lenders generally require borrowers who put less than 20% down to have “escrows” or “impounds” on their loans. If your mortgage servicer collects your taxes in an escrow/impound account, you pay a prorated portion of your property taxes with each month’s mortgage payment. An increase in the tax rate can lead to a higher payment from one year to the next. Your payment might also go up if the servicer previously underestimated how much tax you would owe and needs to make up the difference.
Higher Homeowners Insurance Premiums
If your mortgage has impounds, the homeowners insurance portion of your payment might rise due to factors like claims, natural disasters or a drop in your credit score.
In that case, you might want to shop for another insurer or try to get a more affordable policy with your current insurer. “Get with your current insurance company and ask them about any discounts you might be missing out on,” says Aaron Craig, vice president of mortgage and indirect sales at Georgia’s Own Credit Union. “Or possibly raising your deductible to an acceptable level (that) will still keep your premiums down on your insurance.”
Just make sure you don’t let your homeowners policy lapse without replacing it. Mortgage servicers can buy a “force-placed” or “lender-placed” insurance policy to protect their interest in the property if you let your coverage lapse. A force-placed policy will almost certainly cause your mortgage payment to increase, as it can be up to 10 times more costly than traditional property insurance.
Rate Buydown Adjustment or Expiration
A temporary interest-rate buydown lowers your interest rate for the first few years of your loan, giving you a lower payment during that period. For example, with a 2-1 buydown, your interest rate is 2 percentage points lower than the regular rate in the first year of the loan. In the second year, it rises to just 1 point less than the regular rate, and you pay the full rate beginning in the third year. Transitioning from one phase of the buydown to the next gives you a higher rate and monthly payment.
The Close of a Forbearance Agreement
Entering into a forbearance agreement can lower or suspend your mortgage payment for a limited time while you recover from a hardship. Once the forbearance period is over, your monthly payment goes back up to the normal amount. Or higher — depending on the terms of the agreement, you might owe some larger-than-usual payments to make up for the months you missed.
“We’ve seen mortgage lenders where they take that one or two or three months’ worth of missed mortgage payments and maybe just simply add it to the back end of the loan. Some lenders have a different position. Some may take those few months’ worth of payments not being made and then want it in a lump sum a year down the road,” says Matt Weaver, mortgage originator at CrossCountry Mortgage.
[SEE: Current Jumbo Mortgage Rates]
Can Mortgage Payments Go Down?
Changes to your monthly mortgage payment don’t necessarily mean a higher bill. These factors can result in a lower mortgage payment.
Loan Forbearance
If a temporary hardship is preventing you from paying your mortgage, your servicer might offer you a forbearance program in which you stop payments or make reduced payments for a short time. When forbearance goes into effect, your monthly payment decreases, although it will increase when you exit forbearance.
Loan Modification
A loan modification is another method that servicers use to help borrowers with hardships continue to afford their mortgages. If you’re dealing with a long-term hardship or have had a permanent change to your income, your servicer might lower your payment by dropping your interest rate, reducing your principal balance or extending your loan term. Once your servicer applies the modification, you make more affordable mortgage payments going forward.
Rate Adjustment
The rate on an adjustable-rate mortgage can go down if interest rates in the general economy fall. That results in a lower monthly payment. However, many ARMs have “floors,” which prevent your interest rate from falling below a predetermined level.
Cancelling Private Mortgage Insurance
If you have a conventional loan with private mortgage insurance, or PMI, your lender must automatically cancel your coverage and stop charging you when your loan balance drops to 78% of your original property value. And you may be able to trim that expense sooner. According to the Consumer Financial Protection Bureau, your mortgage servicer is required by law to grant a request to cancel your PMI. However, you must pay your balance down to 80% of the original property value and meet these criteria:
— Your request is in writing.
— You have a good payment history and are current on your payments.
— You can certify that there are no junior liens (such as a second mortgage) on your home.
— You can show that the value of your property hasn’t declined below the original value of the home.
“The lender may require a full appraisal, or they may just be OK with an AVM, an automated valuation system, which would be cheaper and quicker,” Craig says.
[READ: 2025 Housing Forecast: When Will Mortgage Rates Go Down?]
How to Avoid Surprise Increases in Your Mortgage Payment
Surprise increases can throw your budget off and ripple through your entire life. Read all notices from your servicer, your insurance company and your local government. Make sure you have a heads-up about future changes to your escrow payments.
“Stay (on top of) your real estate tax bill and your insurance bill. A lot of times homeowners ignore those two, so it becomes a surprise. It’s not that the lender’s trying to make it a surprise, but the lender has to react to the increase in either taxes, insurance or both,” Weaver says.
Your servicer will send you a letter seven to eight months before the first rate adjustment on an adjustable-rate mortgage and two to four months before subsequent rate adjustments. But it’s a good idea to set some additional reminders for yourself, too.
“I would put some kind of a technology reminder on your calendar two or three months before the payment is scheduled to be reviewed, whether it’s five or seven years down the road. It’s just some kind of a thing that’s going to pop up and remind you, ‘Hey, we need to look at this because in two or three months our rates could potentially go up or down,'” Craig says.
More from U.S. News
Is Mortgage Interest Tax Deductible?
What Is a Mortgage Acceleration Clause?
How to Buy a House Without a Mortgage
Why Your Mortgage Payment Went Up originally appeared on usnews.com
