Your home is your sanctuary, but what happens when your mortgage payment starts creeping up? It's a question that many homeowners face. Understanding the reasons behind a sudden increase in your mortgage payment can help you take control of the situation and make informed decisions about your finances.
In this article, we'll dive into the 9 most common reasons why your mortgage payment might have gone up. From interest rate changes to property tax hikes and more, we'll explore each factor in detail and offer practical tips for managing your payments.
Reason 1: Your Adjustable-Rate Mortgage (ARM) Has Seen An Increase In Interest Rates
If you have an ARM, your mortgage payment may have increased as a result of an increase in the loan's interest rate. This can happen when the initial fixed-rate period on your ARM expires, which means that the interest rate can start to fluctuate based on market conditions.
An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate can change over time, based on a variety of factors such as changes in the market interest rate, changes in the lender's cost of funds, or changes in the index rate on which the interest rate is based.
Let me break it down for you; a perfect example would be a 40-year adjustable rate mortgage that comes with a fixed period of 15 years and a set interest rate of 5%. This means for the first 15 years of the mortgage loan, you will only need to pay the fixed interest rate amount.
After the fixed 15-year period if the current market rate has risen, your interest rate will also increase. You will then be required to pay the increased rate for the rest of the loan.
It's important to note that the terms of an ARM can vary depending on the lender, so it's essential to read the loan documents carefully to understand how the interest rate can change over time.
ARMs can be a good option for some borrowers who want to take advantage of lower initial interest rates, but they can also be risky if interest rates rise significantly, as this can lead to higher monthly payments.
If you have an ARM and are concerned about the possibility of your interest rate increasing, there are a few things you can do.
- If there is a projected rise in interest rates, you will need to keep an eye on interest rate patterns. Monitoring these trends will give you insight into how the rates might fluctuate over time.
This can help you predict any potential increase or decrease in your mortgage payment. By doing this you will be able to prepare and adjust your budget to meet any increase and plan for future payments.
- If you want to change your ARM loan to a loan that offers more stable and predictable interest rates, refinancing is a great option.
To refinance your ARM into a fixed-rate mortgage all you have to do is apply for an FRM. Once it is approved, you can use the funds from your new loan to pay off your adjustable-rate mortgage.
When you’ve paid off your ARM you can begin making monthly payments for your new loan. It’s important to factor in additional fees like closing costs when you refinancing.
Reason 2: You Have a Pay-Option Loan or an Interest-Only Loan, and You Are Beginning to Repay the Principal
If you have an interest-only or pay-option loan, your mortgage payment may have gone up because you are starting to pay the principal.
A pay-option loan is a type of adjustable-rate mortgage loan that allows borrowers to choose from different monthly payment options. Borrowers have the flexibility of choosing from these three options:
- Paying an amount that covers both interest and principal
- An interest-only payment requires the borrower to pay a monthly amount that only covers their interest rate.
- Paying a limited amount that does not cover the interest.
You can choose the interest-only payment for a specific period, say 7-10 years. This means you are required to pay only the interest of your mortgage, with no other additional payments for that time frame. Interest-only payments are lower than a traditional mortgage and this can be financially beneficial to borrowers.
However, the downside to this payment option comes when the fixed period comes to an end and the borrower is required to repay the principal. Monthly payments that include both the principal and interest have to be made. This can significantly increase monthly mortgage payments.
For example, let's say you have a 10-year interest-only mortgage with a balance of $300,000 and an interest rate of 4%. During the first 10 years, you only make payments on the interest, which would be approximately $1,000 per month.
However, after the 10-year period ends, you would be required to start making payments toward the principal, which would be approximately $1,800 per month based on a 20-year repayment schedule.
If you have an interest-only or pay-option loan and are concerned about the possibility of your monthly payment increasing, there are a few things you can do.
- Refinancing your interest-only loan into a conventional mortgage that has a fixed payment schedule can help you plan for your future. Fixed-rate mortgages are more predictable in terms of monthly payments. Their interest rates do not change over the course of the loan term and this protects you from interest rate hikes.
- Alternatively, to prepare yourself for a higher monthly mortgage, you can make voluntary principal payments during your interest-only period. Doing this will reduce the total amount of interest paid over the life of the loan. It can help you build home equity and a good credit score.
Reason 3: Your Property Taxes Or Homeowner's Insurance Premiums are Being Paid Through an Escrow Account, and Both Have Increased
If you have an escrow account and your mortgage payment has gone up, it may be because your property taxes or homeowners insurance premiums have increased.
An escrow account is a separate account that your mortgage servicer sets up to collect payments for property taxes and homeowners insurance premiums on your behalf. The servicer then pays these bills on your behalf when they come due.
The amount of money that your mortgage servicer collects each month for your escrow account is based on estimates of your annual property taxes and homeowners insurance premiums. If these estimates were too low, your mortgage payment may have gone up to cover the difference.
Property taxes and homeowners' insurance premiums aren't always set in stone. There are a few reasons they might increase over time.
For your property taxes, a few culprits could be a change in local tax rates or changes in the assessed value of your property. Similarly, homeowners' insurance premiums could rise because the value of your home has increased, you've made changes to your coverage, or the risks of damage or loss to your property have changed.
It's important to note that your mortgage servicer is required by law to provide you with an annual statement that shows the activity in your escrow account. This statement should show how much money was collected, how much was paid out, and what the balance is in the account.
If you have an escrow account and are concerned about the possibility of your monthly payment increasing, there are a few things you can do.
- To get started, consider reaching out to your mortgage servicer and asking for an explanation regarding the recent increase in your payments. Your servicer can offer a detailed breakdown of any changes in your property taxes or homeowners insurance premiums that may have led to the increase.
- If you feel like property taxes or homeowners insurance premiums are weighing too heavily on your wallet, another avenue is to appeal the assessment of your property taxes. You can also shop around for alternative insurance policies.
It's important to keep in mind that changes to your property taxes or insurance premiums may not happen immediately, as they are typically determined on an annual basis.
Reason 4: If You Don't Already Have an Escrow Account, Opening One Will Raise Your Mortgage if You Do
An escrow is a financial account owned by a neutral third party on behalf of the other two parties involved in the financial transaction. When you purchase your home, your lender opens up an escrow account to pay for your purchase and insurance.
This is largely dependent on your credit score or loan-to-value ratio. If your lender realizes these values are not up to the required standard you may be asked to set up an Escrow account.
This means that you'll have to pay a little extra each month to cover your tax and insurance payments, which will be included in your mortgage payment. Keep in mind that you'll also need to make an upfront payment to set up the account.
It's important to note that there are some benefits to having an escrow account.
- For one, it can help you budget for your annual property taxes and homeowners insurance premiums by spreading out the payments over the course of the year.
- It can also provide a sense of security, knowing that these bills will be paid on time and that your home will be protected by insurance.
Reason 5: If New Fees Were Never Applied To You
Other fees, such as a late fee for skipping a payment or a prepayment penalty for paying down your loan early, may also be assessed by your mortgage loan officer.
Borrowers who make regular monthly payments may be charged late fees if they accidentally miss any installments. To understand this better, let's say you have a 35-year fixed-rate mortgage that requires a monthly payment of $2,000.
For the first 10 years of the loan, if you make regular payments no additional fee will be charged and your mortgage price will remain stable. However, if you’re late on a payment your mortgage loan officer might fine you and charge you late fees.
If the fine is $100, it will be added to your next monthly payment. This means instead of $2,000 you'll have to pay $2,100.
It's important to note that late fees are typically charged as a percentage of the amount of the missed payment, so the actual fee charged may vary depending on the size of your payment and your lender's policies. Some lenders may also charge a flat fee for late payments.
- If you think that the late fee you were charged was unfair or applied in error, don't hesitate to reach out to your mortgage loan officer. Doing so, you will be able to get more information on how to handle the fee and help you dispute the charge if necessary.
- You can also try to bargain with your lender to reduce the high fees. They can either accept to reduce the fees or waive them totally. Considering the strict policies of most lenders, this might be a difficult request.
Reason 6: Your Mortgage Servicer Simply Made a Mistake
If your mortgage payment has gone up unexpectedly, it's possible that your mortgage servicer made a mistake. Mortgage servicers are responsible for collecting payments on behalf of the lender and managing the day-to-day administration of your loan.
It is not uncommon for mistakes to happen when it comes to mortgages. They are often a result of various things like miscommunication, technical issues, or just a mistake in data entry. Unfortunately, these mistakes can lead to your payment amount being changed and increased.
Did you notice that your mortgage servicer has made a mistake? You don’t need to panic. Instead, reach out to the servicer to resolve the issue. You can always give them a call as recommended by the Consumer Financial Protection Bureau (CFPB). Bring the error to their notice and request an investigation.
When you call your servicer, be prepared to provide them with as much information as possible about the issue, including your loan number, payment history, and any documentation that supports your claim.
It's also a good idea to keep detailed records of your conversations with your servicer, including the date, time, and name of the representative you spoke with.
If your servicer determines that they made a mistake, they should correct the issue and adjust your payment accordingly. If they do not correct the issue or if you are not satisfied with their response, you can file a complaint with the CFPB or seek legal advice.
Reason 7: You Refinanced Your Mortgage to a Shorter Loan Term
Refinancing is the process of replacing your existing mortgage with a new one that has different terms, such as a lower interest rate or a shorter loan term.
If you refinanced to a shorter loan term, such as from a 30-year to a 15-year loan, your monthly payments may have increased. This is because shorter loan terms typically come with higher monthly payments, but they also result in paying less interest over the life of the loan.
For example, let's say you had a 30-year fixed-rate mortgage with a balance of $200,000 and an interest rate of 4%. Your monthly payment would be $954.83, and you would pay a total of $143,739.01 in interest over the life of the loan.
If you refinanced to a 15-year fixed-rate mortgage with an interest rate of 3%, your monthly payment would increase to $1,405.34, but you would pay a total of only $50,560.27 in interest over the life of the loan.
Although your monthly payment may increase, the amount of interest you would have saved would have significantly increased.
But, it is also important to weigh the cons. Shorter loan terms come with higher monthly payments that may be tough to manage. So before you make a decision be sure to carefully consider all your options.
If you are struggling to make your new mortgage payment after refinancing, there are a few things you can do.
- You can try reaching out to your mortgage servicer. Enquire about ways they can assist you in making adjustments to your payment plan. They are in the best place to offer a better repayment plan or adjust the loan terms to make it easier for you.
- You can also choose to find other means to modify your income and expenditure. Reducing expenses and increasing your monthly income will help you afford higher payments.
Reason 8: Your Service Member's Benefits Have Expired
The Servicemembers Civil Relief Act (SCRA) is a federal law. It provides certain legal and financial protection for active-duty military personnel and other uniformed services.
Some SRCA protection also applies to dependents ( the spouse of active-duty personnel or other family relations). According to The United States Department of Justice, there are five main protections that service members and their dependents inquire about:
- Protection against foreclosure on their homes
- Protection against default judgments in civil cases
- Protection against repossession of property
- A reduction in the interest rate on any pre-service loan to a maximum of 6%
- Termination of automobile and residential housing leases without penalty.
Once the period of active duty ends, SCRA laws no longer apply. This means a service member that enjoyed some of these protections while on active duty might see a change in their mortgage payments. Monthly payments might increase for individuals, for instance, if the contractual interest rate is above 6%.
These individuals are no longer protected by active-duty laws and their interest rates can increase.
Let's say you are an active duty service member with a 30-year fixed-rate mortgage at an interest rate of 4%. Your monthly payment is $954.83, and you have been making your payments on time every month for the past year.
After two years on active duty, your service member benefits period ends. Your mortgage servicer notifies you that your interest rate will now be adjusted to the contractual rate of 7%, resulting in a new monthly payment of $1,331.21.
It's important to note that the end of your service member benefits period is not necessarily the same as the end of your active duty service. Your benefits period may continue for a period of time after you leave active duty, depending on the terms of your loan and the specific circumstances of your service.
If your service member benefits period has ended and your payments have increased, there are a few things you can do.
- First, you can contact your mortgage servicer to ask about options for lowering your payment. They may be able to offer a repayment plan or modify the terms of your loan to make the payments more manageable.
- Another option is to explore other benefits and resources available to service members and veterans, such as those offered by the Department of Veterans Affairs (VA). The VA provides a range of programs and services to help veterans and service members with housing, financial assistance, and other needs.
Reason 9: There is a Buy-Down Clause in The Terms of Your Mortgage
If your mortgage payment has gone up unexpectedly, it's possible that the terms of your mortgage include a buy-down clause.
A buy-down clause is a finance technique that can be included in some mortgage contracts. It allows borrowers to temporarily reduce their interest rates by paying an up-front fee. They can also do this by purchasing discount points against the loan.
There are different buy-down structures:
- 2-1 buydown: This buy-down allows the borrowers to pay lower interest rates for the first two years of the loan. A 1% incremental increase occurs annually and the full interest rates start to apply during the third year.
- 3-2-1 buydown: Buyers pay lower interest rates for the first three years of their mortgage and full interest rates will only apply during the fourth year.
- Temporary buydown: Temporary buy-down clauses only reduce the interest rates on loans for a set period.
- Permanent buydown: With this buy-down technique, discount points or fees are paid to permanently reduce the interest rate on the loan.
Buy-down fees are typically paid as part of the closing cost of a mortgage deal. Most of them last a few years and the borrowers enjoy lower interest rates.
However, once the buy-down period ends, your payments may increase. This is because the interest rate on your mortgage will increase to its original rate, and your monthly payment will be adjusted accordingly.
For example, let's say you have a 30-year fixed-rate mortgage with a buy-down clause that lowers your interest rate from 5% to 3% for the first three years of the loan. During this time, your monthly payment is $843.21.
However, once the buy-down period ends, your interest rate will increase to the original rate of 5%, and your monthly payment will increase to $1,073.64.
This article covers 9 reasons why your mortgage payment may have gone up, including an increase in interest rates for adjustable-rate mortgages or the start of principal payments for interest-only or pay-option loans.
Other factors that can cause your payment to increase include higher property taxes or insurance premiums, adding an escrow account, new fees, mistakes made by your mortgage servicer, the end of a Servicemember Benefits Period, or the expiration of a buy-down clause.
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here’s how we make money.