A lot of first-time homebuyers are shocked when this happens.
They buy a house with a fixed-rate mortgage, they think their monthly payment is locked in forever, and then one day they get a notice from their mortgage servicer saying their payment is going up.
Sometimes it goes up by $100.
Sometimes it goes up by several hundred dollars.
And in extreme cases, I have seen payments increase by more than $1,000 per month.
So here’s the deal: your interest rate may be fixed, but your full monthly mortgage payment may not be.
That’s because your monthly payment is usually made up of more than just principal and interest.
Most homeowners are also paying property taxes and homeowners insurance through something called an escrow account.
And when those costs go up, your total monthly payment can go up too.
If this is you, in this post I explain why exactly your mortgage payment went up and what you can do about it.
What is included in a mortgage payment?
When most people say “mortgage payment,” they are usually talking about the full amount they send to the mortgage company every month.
But that payment can include several different pieces:
- Principal
- Interest
- Property taxes
- Homeowners insurance
- Mortgage insurance, if required
- HOA dues, in some cases, although these are usually paid separately
If you have a fixed-rate mortgage, the principal and interest portion of your payment is going to be fixed. That payment does not change.
That means the loan itself is not changing.
But your property taxes and homeowners insurance can change over time.
And that is where the payment shock usually comes from. Most people are unaware that this can and most likely, will change.
What Is an Escrow Account?
An escrow account is basically a separate account managed by your mortgage servicer.
Every month, part of your payment goes into this account to cover future property tax and homeowners insurance bills.
Your property taxes are not usually due every month. Depending on where you live, they may be due once a year, twice a year, or quarterly.
Homeowners insurance is also typically billed annually.
But instead of making you save for those bills yourself, the lender collects a portion every month and then pays those bills when they come due.
For a lot of homeowners, this is convenient because it spreads large annual expenses into smaller monthly payments.
But there is one major downside.
If your taxes or insurance increase, your lender may need to collect more money from you every month and this is where escrow shortages can happen.
Why Your Mortgage Payment Can Go Up
Your monthly payment can go up because of an escrow shortage.
An escrow shortage happens when your mortgage servicer reviews your escrow account and realizes there is not enough money being collected to pay your upcoming property tax or insurance bills.
This can happen for several reasons but the biggest one right now is rising property taxes.
Home values increased dramatically in many areas over the past few years. As home values rise, county tax assessments may also rise. When that happens, your property tax bill can increase.
Another major issue is homeowners insurance.
Insurance premiums have gone up in many parts of the country because of higher rebuilding costs, weather-related risks, and insurance market changes.
So even if your mortgage rate is fixed, your total monthly housing payment can still rise because your taxes or insurance went up.
That is why a homeowner can have a fixed 30-year mortgage and still see their payment increase.
Can You Avoid an Escrow Shortgage?
There is one strategy that may help certain borrowers avoid escrow payment shock: waiving the escrow account.
When you waive escrow, your mortgage company does not collect monthly payments for your property taxes and homeowners insurance.
Instead, you are responsible for paying those bills yourself when they are due.
This means your monthly mortgage payment to the lender may only include the loan payment itself, such as principal and interest, and possibly mortgage insurance if applicable.
However, this does not mean your property taxes or insurance disappear.
You still owe them.
You just handle them directly instead of having the lender collect them every month.
can I waive my escrow account and how do I do that?
Not everybody can waive an escrow account due to many factors but in most cases, escrow waivers are generally more common with:
- Conventional loans
- Jumbo loans
- VA loans, depending on lender guidelines
However, escrow waivers are usually not available in the same way for FHA and USDA loans.
That means if you have an FHA or USDA mortgage, this may not be an option for you.
Also, even with conventional, jumbo, or VA financing, not every lender allows escrow waivers unless you have a Loan to Value under 80%.
Some lenders may require you to put at least 20% down. Others may allow escrow waivers with less than 20% down depending on the loan program, borrower profile, state rules, and investor guidelines.
That is why it is important to ask about escrow waivers before choosing a lender.
Final Thoughts
A fixed interest rate does not always mean your total monthly payment can never change.
Your principal and interest may be fixed, but your property taxes and homeowners insurance can still increase.
And if those costs are being collected through an escrow account, your mortgage servicer may increase your payment to cover the higher bills.
For some borrowers, waiving escrow can be a useful strategy. But it only works if you are disciplined enough to save for taxes and insurance on your own.
Before you buy a home, make sure you understand the full payment, not just the interest rate.
Because the payment you start with is not always the payment you keep.
