Why Did My Mortgage Payment Go Up?

Wondering why your mortgage payment increased? Learn about the factors that can cause changes, such as interest rate adjustments, property taxes, and insurance costs, and how to manage these fluctuations.

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You’ve bought a house. You’ve locked down all the details, signed all the papers, and are set to make a monthly payment for at least 15 years.

Then one month, your mortgage payment suddenly goes up.

Huh? Is your lender trying to pull a fast one? Aren’t mortgage bills supposed to be as steady as the sun rising in the east?

Nope, and feel free to be perturbed. Especially if you are a first-time home buyer.

“For many homeowners, a consistent mortgage payment provides peace of mind,” said Doug Nunnery, a real estate broker with Round Table Realty in St. John’s, Fla. “However, there are several reasons why your payment might unexpectedly go up.”

Why Mortgage Payments Can Increase

The devil is always in the details when it comes to mortgage increases. Details like tax assessments, exemptions, interest rates, and insurance costs. Even a fixed mortgage is never really fixed.
Here’s a look at those devilish details.

Property Tax Changes – Reassessment or Exemptions

Cities, counties, and school districts impose taxes on properties, like your house. What you pay depends on the market value of your house and the land it sits on.

“If your local government raises tax rates or your home’s assessed value increases, your monthly payment will rise to cover the higher costs,” Nunnery said.

An assessor determines that dollar figure and the taxing body takes a percentage of it. A lot depends on where you live.

Alabama had the lowest overall rate in 2024 at 0.41%. New Jersey had the highest at 2.49%.

In real dollars, which means if your house was valued at $300,000, you’d have paid $1,230 in property taxes in Alabama. In New Jersey, your bill would have been $7,740, or more than six times higher. Welcome to the Garden State!

Homeowners usually get a new property assessment every year. You can appeal if you think the assessor has overvalued your property.

Exemptions can decrease your tax bill. Among them are homestead, veteran, senior, disability, or income-based exemptions. If they expire or you no longer qualify for the exemptions, your property taxes will increase.

Adding an Escrow Account

An escrow account holds money to pay for property taxes and insurance. Your lender will estimate those costs over a one-year span, divide the total by 12, and add that to your monthly mortgage.

You can pay those bills yourself, though about 80% of homeowners let their lenders pay those bills through the escrow process. That despite the fact the average escrow fee is 1%-2% of the purchase price of the home. Some lenders will charge a flat fee for escrow accounts.

As for why your escrow costs might increase, it’s pretty simple. If your property taxes or insurance premiums go up, so will your monthly escrow payment.

Changes in Interest Rates

Most of your mortgage payment goes to pay interest on your loan. About 92% of mortgage holders lock in a fixed interest rate when they buy a house, according to the Federal Reserve Bank.

The other 8% use adjustable-rate mortgages, or ARMs. With an ARM, there’s a set rate for an introductory period, which is usually 5, 7, or 10 years.

The lure is that the initial rate is lower than what you’d get with a fixed-rate loan. The downside is when the introductory period ends, your interest rate could skyrocket.

“Your initial fixed-rate period will eventually end,” Nunnery said. “When this happens, your interest rate may increase based on market conditions, leading to higher monthly payments.”

Conditions haven’t been very favorable for consumers in recent years. For example, the interest rate in October 2018 on a 30-year fixed-rate mortgage was 4.8%. The introductory rate on a five-year ARM was 4.1%.

If you borrowed $400,000 on a five-year ARM, your monthly payment was $1,982. However, the interest rate increased to 7.6% by October 2023, when your ARM expired.

That meant your monthly payment increased to $2,824. And it would continue to fluctuate each year with the market. That could cost you an ARM and a LEG.

Mortgage Refinance

Interest rates were historically low prior to 2022, so millions of homeowners refinanced their mortgages. That allowed them to save thousands of dollars a year on interest payments.

The mortgage refinance business dried up when interest rates more than doubled after the pandemic. But if you do go down that road, it would explain why your mortgage payment went up.

That’s especially true if you switch from a 30-year loan to a 15-year or some other shorter loan term. You would pay off your house much sooner and save a ton of money on interest charges. But you’d also have higher monthly payments since the payoff time is condensed.

Service Member Benefits

Congress gave military personnel a variety of housing and other financial protections when it passed the Servicemembers’ Civil Relief Act (SCRA) in 2003. It helps them manage finances while in the military by limiting charges for rental agreements, security deposits, interest rates, and other issues while on active duty.

When it comes to mortgages, lenders can’t foreclose on homes, enact late fees, or charge more than a 6% interest rate for one year after the service member ends his or her active-duty assignment.

That’s a nice perk for service members. But when that year expires, their mortgage payment might be in for a hike.

Can Mortgage Payments Go Down?

Sir Isaac Newton wasn’t thinking about mortgage payments when he said, “What goes up must come down,” but the principle sometimes applies.

We’ve seen why your monthly payment can increase. Here are a few reasons why it could decrease.

Property Taxes

Just as the property appraiser can raise the taxable value of your house, he or she can also lower it. It could be caused by damage or disrepair to your house, overall market conditions or other factors.

Whatever the reason for the decrease, it could affect your house’s resale value. That’s the downside. The upside is you’ll pay less in property taxes.

Tax Exemptions

Homestead exemptions and other tax breaks for veterans, senior citizens, military members, and other groups can expire. Or you may no longer qualify for the exemption, which means a larger mortgage payment.

Conversely, government entities can pass new exemptions that will lower your bill. For instance, in 2024 Kansas passed a bill that will slash income and property taxes by $1.2 billion over three years. Welcome to the Wheat State!

Change in Homeowners Insurance

If you have mortgage payments, you’ll need homeowners insurance. But you can choose which insurance carrier you use.

Premiums can vary by thousands of dollars, especially if you bundle your homeowners and auto policies. Review your coverages annually and shop around for the best deal.

Removing Private Mortgage Insurance

If your down payment is less than 20% of your home loan, lenders usually require you to get Private Mortgage Insurance (PMI). If you default, your lender is protected since the PMI carrier pays off the loan.

PMI costs depend on the size of your loan, your credit score, and other factors. They typically range from 0.46% to 1.5% of the loan per year. So, PMI on a $400,000 mortgage could range from $2,000 to $6,000 a year.

At the top end, that would be $500 a month. The good news is if your mortgage balance drops to 78% of your home’s original purchase value, or you are halfway through your loan term, you no longer need PMI.

Additional Mortgage Resources

Mortgages make up about 70% of consumer debt, so any increase is going to send shockwaves through a lot of budgets, especially when it seemingly comes out of nowhere.

If you’re worried about how to handle such fluctuations, here are some strategies to consider.

  • Pay off your mortgage early. That may be impossible if you’re on a tight budget. But if it is possible, it’s well worth trying to pay off a 30-year mortgage in 15 years. You’d have to pay extra each month, but you could save thousands of dollars on interest payments. A nonprofit credit counselor could analyze your financial situation and offer advice on how to more quickly pay off your loan.
  • Hunt for a better interest rate. Interest rates have skyrocketed since 2022, but they’ve settled in the 7% range. They are bound to fluctuate, so keep an eye on today’s best mortgage rates. If you could drop your rate by just 1%, it could be worth the expense and hassle of refinancing your loan.
  • Get help with your mortgage payment. Alas, home loans are not like student loans. The federal government did not spend $180 billion forgiving them in the past few years. But if your mortgage payment increases or you just can’t financially handle it anymore, there are ways to get help with mortgage payments. They include loan modifications, mortgage forbearance, refinancing, and renting the home.

“The right mortgage depends on your financial situation, goals, and comfort level with risk,” Nunnery said. “Consult with a mortgage professional to evaluate your options and choose the loan that best suits your needs.”

That won’t prevent your mortgage payment from unexpectedly going up, but it might make the bad news easier to swallow.

About The Author

Bill Fay

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet.

Sources:

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