It happens. Your monthly mortgage payment has increased for reasons unknown to you. It could be an error on the part of the loan servicer; but most often than not, the change has to do with the inner workings of your mortgage.
After all, you chose a mortgage mainly based on affordability or its low monthly mortgage payment. Better to understand how mortgage payments can change and what you can do about it.
Three Reasons Why Your Monthly Mortgage Payment Increased
The Consumer Financial Protection Bureau listed three main reasons why a monthly mortgage payment changes or goes up. These are:
- Your interest rate increased.
- Your property taxes or homeowners insurance premiums increased.
- Your loan servicer/lender assessed fees added to your mortgage payment.
ARM and Rate
If you have an adjustable-rate mortgage, your interest rate will change throughout the life of the loan. The frequency of this rate adjustment depends on how the ARM plan is structured.
For example, you have a 5/1 ARM.
- The “5” represents the number of years that the rate will not change or remain fixed.
- The “1” represents the frequency that the rate will change after the fixed-rate period.
In this case, the rate will adjust once every year after five years of having a fixed rate. During this “floating” period, the rate could increase or decrease and when it does, the mortgage payment will go up or down as well.
An ARM rate is tied to an index plus a margin. This index reflects the general market conditions tracked by LIBOR, COFI, MTA or MAT (12-month average of Treasury bills) and other third parties.
The margin is the percentage points added by your lender to the index. Together, the index and margin make up your interest rate after the initial fixed-rate period has expired.
While it’s true that ARMs can go up, thus the increased monthly payments, these increases are checked by caps that (i) limit how high the rate can go or (ii) how much the monthly mortgage payment can go up.
Property Taxes and Homeowners Insurance Premiums
Even fixed-rate mortgages, which are hailed for their stability, can see an increase in their monthly payments.
Remember your PITI — principal, interest, taxes, and homeowners insurance premiums. The principal and interest components of a fixed-rate mortgage will remain the same throughout the life of the loan.
As to the taxes and homeowners insurance premiums, they are placed in an escrow account by the lender at closing. In case of tax hikes and premium increases, the lender will initially pay for any shortfall until such time as it has adjusted your monthly payment.
These fluctuations in property taxes/homeowners insurance premiums can increase your monthly mortgage payment.
Lender Assessed Fees
Were you late on your last payment? This and other fees depending on the status of your mortgage can inflate your next mortgage payment.
Late fees, for instance, can be 4% to 5% of the overdue amount. This is provided that your lender is authorized in your mortgage contract to collect late payments.
For more information or clarification on any assessed fees or other payment concerns, don’t hesitate to write to your lender or loan servicer.
It certainly matters to take time to shop and ask around about mortgages before getting one. Know before you owe and ask questions.