Mortgage payments are generally very stable and will remain the same over many years, if not for the entire life of the mortgage. This is one of the many benefits of getting a mortgage over renting a home. But there are times when mortgage payments do change, and if your monthly payment has recently increased, it could be down to one of the following reasons:
1. Your Property Taxes Increased
There are four parts to a monthly mortgage payment. Interest and principal account for just two of these and while they will rarely increase, the same can’t be said for the third, property taxes.
Your property taxes are collected every month, after which they are held in Escrow and then released at the end of the year. The homeowner is always liable for these costs and they are always paid annually, but the mortgage lender takes them from you in monthly installments and essentially pays them for you.
Property taxes are fixed as a percentage of the total value of your home. This percentage changes from state to state, but the average is around 1%.
For a $250,000 house, this means you will pay $2,500 a year. Every month, these taxes will add $208 to your monthly mortgage payment and you will pay this from the first month until the last.
If your property appreciates, your property taxes may be reassessed. For example, if that $250,000 house is suddenly appraised at a value of $350,000, you’ll now owe $3,500 in annual taxes or around $291 a month, an increase of $83 from your previous mortgage payment.
2. Your Homeowners Insurance Increased
We mentioned that interest and principal payments account for two of the four payments you make every month, with property taxes being the third.
That leaves one more; homeowner’s insurance premiums.
Homeowners insurance is also paid every month and then released every year. Unlike property taxes, it likely won’t increase just because your house is more valuable, but it may increase following a reassessment.
Your insurance company will increase your premiums if you add more coverage or make a claim.
3. You Have an Adjustable Rate Mortgage
If you have a fixed-rate mortgage loan, it shouldn’t increase. The clue is in the name: it will be fixed for a specific length of time.
If, however, you have an adjustable-rate mortgage or “ARM”, it can change over time. Generally, ARMs are cheaper than fixed-rate mortgages in the beginning, but they are subject to change and you may find that you’re paying more money after a few years.
4. You Paid All of Your Private Mortgage Insurance (PMI)
If you fall short of the recommended 20% down payment, you will be asked to pay something known as private mortgage insurance, or PMI.
These payments will typically continue until your loan-to-value ratio reaches 80%, which essentially means that you own 20% of your house. Once that happens, you can request that PMI is removed from your mortgage payment.
If you don’t make such a request, it should be removed by your lender as soon as you have 22% equity in your home.
Mortgage insurance applies to both conventional loans and FHA loans, but the rate you pay can differ based on the value of the property and your location.
Of course, the lack of mortgage insurance will decrease your monthly payment, not increase it, so this is something that all homeowners should welcome and embrace.
On average, you could have an extra $100 in your bank every month and if you put that additional money towards your mortgage payment, essentially keeping the payment the same, you will spend less on interest over the life of the loan.
5. The Lender Made a Mistake
Although rare, mortgage payments can increase because the mortgage company made a mistake.
No one is infallible, including banks and creditors, and if you notice an anomaly in your monthly outgoings, you should contact them immediately to address and remedy the issue.
The error should be fixed with a simple phone call. If not, you can send them a letter known as a “notice of error”. This highlights the mistake and demands that it be fixed. If you were promised that this issue would be addressed over the phone, only for nothing to happen, you should also mention this in your letter and raise a complaint.
How to Reduce Mortgage Payments
Whatever type of mortgage you have and whatever the reason for the recent payment increase, there are a few ways you can reduce your insurance payments:
Refinance Your Mortgage
Many home buyers, especially first time buyers, are so eager to buy that they take chances they shouldn’t be taking and make mistakes they shouldn’t be making.
If they don’t have much money, they may opt for a longer-term mortgage with less of a down payment. They may also have less time to work on building their credit and improving their finances, which means they are forced to accept higher interest rates.
After the dust has settled and they have given themselves time to fix their finances, they are in a much better position and can secure better rates,
If this is the position you find yourself in, then it’s time to refinance your mortgage. If not, work on building your credit score while continuing to pay down as much money as you can on your mortgage,
Most of your early mortgage payments will go toward the interest. The higher the rate and the longer the term, the more will go towards interest payments.
But once you pay the required interest every month, you can start chipping away at the principal. By increasing your monthly payment you can make a dent in the principal and reduce both the interest rates and the length of the loan.
Make a Bigger Down Payment or Make a Lump Sum Payment
It might be too late for down payment tips, but it’s not too late to start adding lump sum amounts to your monthly payment. This will greatly increase the rate at which you repay your mortgage and ensure you clear the balance in full several years earlier.
If you haven’t made the leap just yet and are still contemplating your first steps, try to increase your down payment as much as you can.
One of the biggest regrets that homeowners have is not putting enough toward their down payment. In their eagerness to get a house, they cut corners, take low-down-payment loans, and end up with monthly payments that are much higher than they should be.
With a higher down payment, you’ll need a smaller home loan and won’t be required to pay mortgage insurance. It may also be more realistic for you to get a shorter loan term, which will increase your monthly payment but greatly reduce the interest you pay and ensure you own 100% of your house in much less time.
Bottom Line: Common Reasons and Solutions for Increased Mortgage Rates
As you can see, there are several reasons your mortgage payment can increase, from increased insurance costs and taxes to mistakes and adjustable rates. The changes are common, but the solutions are easy.
Don’t panic, take time to assess the situation, and speak with your insurance agent. If a mistake has been made, it should be fixed quickly; if not, there are still plenty of ways to get on top of things.