What can cause your mortgage payment to change?

If you’re a new homeowner who worked hard to negotiate the best selling price and rate for your home, you might be alarmed to see your bill suddenly change after paying the same cost for months. While those with an adjustable-rate mortgage or expiring temporary buydown might expect these fluctuations to their mortgage payment itself, it’s more common that insurance or tax changes are the cause of most billing surprises for payments coming out of your escrow account.

Prices for homeowner’s insurance, for example, have soared in many areas of the country due to the increasing frequency of natural disasters brought on by climate change, claims increases, inflation and the rising cost of housing materials and labor shortages. Plus, depending on where you live, your property taxes may have similarly increased due to heightened property values.

Let’s explore how changes to your homeowner insurance and taxes can affect your bottom line, and what other potential and more predictable scenarios can cause your mortgage payment to change.

Insurance and property taxes, usually paid through your escrow account, fluctuate and can result in a change in payments. An escrow account is like a savings account that your lender uses on your behalf to pay your insurance and taxes when they’re due. They are often included in mortgages. If the costs for your insurance premiums and taxes increase, the increased charge will be drawn from your escrow account, resulting in an overall increase in your mortgage payments.

Severe weather, heightened property values, an increased number of claims and rising costs in homebuilding materials and labor to rebuild after a claim are the biggest culprits in rising costs. Climate emergencies on both coasts, and rising costs of imported and exported materials indicate the problem isn’t going away anytime soon.

While you can change your homeowner’s insurance anytime, it may be beneficial for you to wait until the end of the policy so you don’t incur any fees or end up unintentionally raising your insurance rates during the period you’re uninsured.

You can also try to reduce your homeowner’s insurance by raising your deductible (in exchange for lower premiums), improving your home security system, replacing outdated or aging infrastructure like roofs or windows, searching for discounts for retirement or professional organizations and bundling policies with auto or life insurance.

Unless you have an adjustable-rate Conventional mortgage loan which depends on fluctuations in interest rates, your primary concern would be about your homeowner’s insurance changing and not your PMI.

As a reminder, if you provided less than 20% down on a Conventional mortgage, you’ll have to buy PMI. This type of mortgage insurance can be removed through a few different common methods to open up your budget. First, you can wait for your lender to automatically cancel your PMI once your loan balance reaches 78% of your home’s original value. Second, you can request cancellation yourself when your balance reaches 80% by writing a cancellation request to your lender. Third, you can get your home appraised again, if you think it may get a higher valuation and reach 20% equity level due to price appreciation.

Property taxes can be reassessed, and the frequency highly varies depending on where you live. Changes are often due to government policies, changing owners or home values in your neighborhood and even renovations that raise your home’s overall value.

If you qualify for property tax exemptions they require you to apply and file on time, so if you miss a deadline, you may not receive the exemptions you previously had. These specific exemptions legally excuse you from paying some or all the taxes you’d be liable for as a homeowner. Property tax exemptions can be based on your occupation or age, whether you served in the military, or if your residence is used for agriculture. It often depends on the area you live in.

All of the fluctuations above are why it’s recommended that your escrow account has a sufficient balance, or “cushion,” to pay these expenses. If there’s a shortage6 in your balance because of any of the mentioned changes, you could expect a higher payment to make up for this difference.

Next, we’ll explore predictable mortgage-changing scenarios that you’ll likely already have on your radar.

An adjustable-rate mortgage (ARM) is a home loan with an interest rate that can change periodically. They start with an introductory fixed interest rate, then adjust after the introductory fixed interest rate period ends. The rate can move up or down based on the index agreed to in terms. Period terms are set up-front and range between 5-, 7- and 10-year terms. 

Since adjustable-rate mortgages are fluid, you wouldn’t be paying the same amount as you would with a fixed-rate mortgage. You may have opted for an adjustable-rate mortgage if the mortgage rate — also known as your annual interest as a percentage of the overall loan amount — was high while you were shopping. This allowed you to pay a lower mortgage rate once economic or global conditions brought the rate down without having to refinance.