Own a Home in America? Why Your Payment Can Increase Even When Your Mortgage Rate Doesn’t Change
Owning a home with a fixed-rate mortgage can give you predictability because the interest rate on the loan doesn’t normally change. But that doesn’t necessarily mean the total amount leaving your bank account every month will stay exactly the same. Your mortgage bill can include property taxes and homeowners insurance in addition to principal and interest, and those other costs can change over time.
First, understand the difference between principal and interest versus your total monthly payment. Principal is the amount being repaid on the loan, while interest is the lender’s charge for borrowing the money. Many homeowners also pay property taxes and homeowners insurance through an escrow account managed by their mortgage servicer.
Property taxes are one reason the total payment can increase. Property taxes are obligations paid to a taxing authority and can be billed monthly, quarterly, annually or on another schedule depending on the jurisdiction. If the amount your servicer needs to collect for property taxes rises, the escrow portion of your mortgage payment can rise even though the interest rate on a fixed-rate mortgage hasn’t changed.
For example, imagine your principal and interest remain $2,200 per month. If the amount needed for property taxes and insurance through escrow was previously $800, your total payment would be $3,000. If those escrowed costs later require $1,000 per month, the total becomes $3,200—even though the $2,200 principal-and-interest portion hasn’t changed.
Homeowners insurance can create the same effect. Insurance premiums can change from year to year, and when insurance is paid through escrow, an increase can be reflected in the amount your mortgage servicer collects from you. The CFPB specifically identifies changing property taxes or homeowners insurance premiums as common reasons a monthly mortgage payment can change.
This is why homeowners should review their escrow statements and tax and insurance bills, rather than assuming every payment increase came from the mortgage interest rate. If your monthly payment suddenly rises by $250, that’s $3,000 more per year coming out of the household budget. Understanding which component changed can help you determine whether the increase came from taxes, insurance or another mortgage-related cost.
Homeowners should also remember that the mortgage isn’t the only housing expense capable of increasing. Maintenance, repairs and certain association or property-related charges can change independently of your mortgage rate. A household that could comfortably afford the property when it was purchased should therefore leave some room in the budget instead of assuming today’s total housing cost will remain unchanged for decades.
The important number to monitor is your total cost of owning the home, not only your mortgage rate. Review your property-tax bill, homeowners-insurance premium, escrow analysis and monthly mortgage statement when they arrive. A fixed interest rate can protect you from changes to that particular rate, but it doesn’t freeze property taxes, insurance or the other costs that come with owning a home.
Disclaimer: This article is for general educational purposes only and is not personalized financial, mortgage, tax, insurance or legal advice. Property-tax systems, exemptions, assessments and insurance costs vary by state and local jurisdiction. Dollar amounts are illustrative examples.