Budgeting for a mortgage payment is one of the first things homebuyers should do. After all, it’s critical that you’re able to make those payments on time and in full every month.
When homeowners secure a mortgage note, they usually think the payment will stay the same amount through the life of the loan. This isn’t always the case. There are several factors that can alter the monthly payment — even if the borrower has a fixed-rate mortgage.
This is troubling news to many homeowners and can come as an unwelcome surprise, especially if the change means a mortgage payment increase. Here are some of the likely reasons a homeowner’s monthly mortgage payment may change over time.
Adjustable Mortgage Rates
The first thing to look at if your mortgage payment changes is how your mortgage’s interest rate is structured. If you have an adjustable rate mortgage, your rate will fluctuate with the current market interest rate. This type of mortgage is usually fixed for the first few years of a loan and then can change every six months to a year, depending on the market interest rate. The mortgage payment can change quite dramatically (up to a few hundred dollars a month in some cases) depending on market changes.
Property Taxes Change
Most mortgage payments include your principal, interest, property taxes, and insurance premiums. Your taxes and insurance payments are collected in an escrow account and distributed to the appropriate parties when they’re due. If property taxes in your area change (this typically happens every so often when the city or county reassesses your property’s value), your mortgage payment amount can change.
Home Insurance Premiums Change
Your homeowners insurance premiums may go up because of a company price increase or due to you filing a claim in the past year. Either way, if your premiums increase, you’ll have to increase the amount that goes into your escrow account to pay them. This situation will cause your monthly payment to change.
An Escrow Account Shortage
Sometimes the amount a borrower pays into escrow isn’t enough to cover the necessary costs when they come due. In this case, the homeowner will be required to make up the shortage with a larger monthly payment.
An Escrow Account Overage
Mortgage payment changes aren’t always increases. If a homeowner finds a better insurance premium, for example, there may be an overage in the escrow account. In this case, their monthly payment could decrease.
What to Do If Your Mortgage Payment Increases
If your payment is increasing, you should receive notice from your lender a month or so before it happens. This gives you some time to figure out how to cover the increase without being late on your obligation. Here are some ways to handle it.
- Make sure it’s not a mistake
Figure out why the change has been made to ensure it’s a legitimate reason. Contact your lender if you have questions about it.
- Reallocate your budget
Cutting out a subscription you don’t use, taking your lunch to work one day a week, or reducing your shopping trips can free up the money to cover a mortgage payment increase.
- Increase your income
Picking up an extra shift and finding a side hustle are good ways to add some extra money to your budget, so you can cover the increased mortgage cost.
- Refinance your mortgage
If your mortgage payment went up significantly, refinancing your loan may be your best bet. Many homeowners can get out from under the private mortgage insurance (PMI) requirement and reduce their interest rate. Being able to refinance can end up decreasing a borrower’s monthly mortgage payment by quite a bit. However, you’ll need to be able to meet credit scoring and other financial requirements just like you did when you first bought your home.
It’s important for homeowners to understand that their monthly mortgage payment amounts aren’t written in stone. As years pass and things change, there could be elements that make their payments increase or, in some cases, decrease. If this happens, there are fortunately several options owners can take to keep their homes and stay current on their payments.