You have a fixed-rate mortgage.
So your mortgage payment should stay the same for the life of the loan, right?
Not always.
This catches homeowners by surprise every year. While the principal and interest portion of a fixed-rate mortgage generally remains the same, your total monthly payment can change if property taxes or homeowners insurance are included in your payment through an escrow account.
Here's what's happening.
First, What Is an Escrow Account?
If your mortgage has an escrow account, your lender collects additional money as part of your monthly payment to cover certain property-related expenses, most commonly property taxes and homeowners insurance.
Instead of receiving those large bills and paying them directly, you pay a portion each month and your lender pays the bills when they're due.
Convenient? Absolutely.
But those expenses aren't fixed.
Why Your Monthly Payment Can Increase
Two common culprits are property taxes and homeowners insurance.
If your property taxes increase, your lender needs to collect more money from you to cover the larger bill.
The same applies to insurance. If your annual homeowners insurance premium increases, the amount going into escrow needs to increase as well.
Your lender periodically performs an escrow analysis comparing what it expects to collect with what it expects to pay.
If the numbers no longer line up, your monthly payment may be adjusted.
What's an Escrow Shortage?
An escrow shortage generally means your lender expects there won't be enough money in the account to cover upcoming escrow expenses while maintaining any required cushion.
Your lender will explain how the shortage will be handled. Depending on your loan and servicer, you may have options involving paying the shortage or having it reflected in future payments.
This is where many homeowners see a noticeable jump in their monthly payment.
What Should You Do If Your Payment Goes Up?
Start by finding out exactly what changed.
Review your property tax information.
Compare your current assessment and tax bill with the prior year. If your assessed value increased and you believe it may be inaccurate, research the appeal process and deadlines in your jurisdiction.
Review your homeowners insurance.
Look at your premium, coverage limits, and deductible. Ask your insurance professional whether there are opportunities to adjust your policy appropriately or whether comparing other carriers makes sense.
Don't look at price alone. Make sure you're comparing similar levels of protection.
Read your escrow analysis.
This document should show how much was collected, what was paid, what your lender expects to pay in the coming year, and how those projections affect your required monthly payment.
One Important Distinction
An increase in your total mortgage payment does not necessarily mean your mortgage interest rate changed.
If you have a fixed-rate loan, your interest rate generally remains fixed according to the terms of the loan.
What may have changed are the other expenses being collected alongside your principal and interest.
Understanding the difference makes a surprise increase a lot less mysterious.
Your Mortgage Deserves an Annual Check-In
We spend a lot of time thinking about mortgage payments when we buy a home and considerably less time thinking about them afterward.
But your taxes, insurance, equity, and overall financial picture continue to change long after closing.
It's worth reviewing those pieces periodically instead of automatically paying the same bill year after year without looking at what's behind it.
And if something related to your home doesn't make sense, ask.
Sometimes five minutes spent understanding a statement today can prevent a much bigger surprise tomorrow.
