Between renting and owning a home, homeownership offers incredible long-term financial benefits that renting does not. One of the reasons homeowners transition from renting to owning is having a fixed payment every month that can’t be changed by a landlord. However, many homeowners still experience changes to their mortgage payments throughout the life of their loan. Let’s explore why a fixed mortgage payment might change.
What Is Included in a Mortgage Payment?
A mortgage payment typically covers more than just the loan’s principal and interest. Each monthly payment may also include property taxes, homeowners insurance, and, if applicable, private mortgage insurance (PMI). Together, these components—Principal, Interest, Taxes, and Insurance (often called PITI)—make up a standard mortgage payment. Understanding each part helps you know where your money is going and prepare for the true cost of homeownership.
In addition to covering the cost of your loan, a mortgage payment also helps protect your investment. By including taxes and insurance, your payment ensures that essential costs like property protection and local taxes are managed. This all-in-one approach simplifies budgeting and keeps you on track for long-term financial stability.
Can Mortgage Payments Change?
Yes, they can. When you get a mortgage, you will choose between a fixed-rate mortgage, a home loan with a fixed interest rate for the entire term, or an adjustable-rate mortgage (ARM), a home loan with an interest rate that changes over time.
If you have an ARM, your rate may adjust periodically based on current market rates and the term of the loan, which you’ll know upfront when you close on your home, so there won’t be any surprises. For fixed-rate mortgages, payments generally stay the same, but if property taxes or insurance premiums increase, your escrow payment may also increase and cause fluctuations in your mortgage payment.
When Does a Mortgage Payment Change?
Has your mortgage payment already changed? Or are you wondering if it ever will? Changes in your mortgage payment can happen due to adjustments in property taxes, your escrow account, or insurance premiums. Here’s what to expect and how to stay prepared.
Property Taxes
Mortgage payments can change when there’s an adjustment in property taxes, which are typically recalculated annually by local governments. If your home’s assessed value increases or if the local tax rate goes up, your property tax amount will likely rise, impacting your monthly mortgage payment if taxes are included in escrow. Similarly, tax reductions or credits can lower your payment. These fluctuations help cover the exact tax costs, ensuring enough funds are available to pay property taxes when they’re due.
Escrow Shortage
An escrow shortage can lead to a change in your mortgage payment, often increasing to cover the shortfall. This happens when there aren’t enough funds in your escrow account to fully cover expenses like property taxes or homeowners insurance, which may have risen unexpectedly. To make up for the shortage, your lender might adjust your monthly payment to rebuild the escrow balance and ensure future bills are covered. Reviewing your annual escrow analysis can help you understand these changes and plan ahead.
Insurance Premiums
Mortgage payments can also change if there’s an increase in your homeowners insurance premiums. Insurance rates can fluctuate based on factors like the value of your home, changes in coverage, or even regional risk factors like weather-related events. If your lender is managing your insurance payments through escrow, an increase in premiums will raise the amount required in your escrow account. As a result, your mortgage payment may go up to accommodate the higher insurance costs. We recommend reviewing your insurance policy regularly to ensure you’re getting the best rate and know what to expect in your mortgage payment.
PMI Removal
Private Mortgage Insurance (PMI) is typically required for conventional loans when a borrower puts down less than 20% of the home’s value. Once your loan balance reaches 78% of the original home value, PMI is automatically canceled, which lowers your monthly mortgage payment. You can also refinance and remove it earlier if you’ve paid the loan down to 80% or if your home’s value has increased significantly.
How to Prepare for Changes to Your Mortgage Payment
When preparing for a change in your mortgage payments, you should understand why the adjustment is happening. You can ask your loan officer to review the changes and confirm the cause. Reviewing your mortgage statements can help you identify specific factors influencing your payments.
Once you understand the cause of the change, consider adjusting your budget to accommodate the new payment amount. Cutting back on non-essential expenses or building an emergency fund can provide a cushion for unexpected costs. If the new payments seem unmanageable, reach out to your loan officer to discuss refinancing options, which could potentially lower your interest rate and reduce monthly payments. Proactively managing these adjustments can help you stay financially secure and maintain confidence in meeting your mortgage obligations.
Stay On Top of Your Mortgage
Staying on top of your mortgage is essential, especially as your monthly payment can change over time. Understanding why these adjustments happen—whether due to changes in property taxes, homeowner’s insurance, or a shortage in your escrow account—can help you plan your finances and avoid surprises. By reviewing annual escrow analyses and staying informed about factors that affect your mortgage, you’ll be prepared for any fluctuations and can take steps to manage your budget effectively.
Refinancing can help homeowners open opportunities to lower payments, shorten loan terms, or tap into home equity. If you’re curious to see what it could do for you, learn about the cost of refinancing and how the process works.
