Mortgage payments are the biggest expense in American households, costing families 33.8% of their annual income last year—and the cost of owning a home has increased by 1. .6% from 2020 to 2021, according to the Bureau of Labor Statistics.
Understanding why your mortgage payment may increase every year can help you plan ahead to meet your financial obligations.
Why is my mortgage payment going up?
Mortgage payments can fluctuate due to changes in the economy such as interest rate increasebut can also change for other reasons, such as if your property taxes or homeowners insurance premiums go up.
Then we’ll look at the possible reasons your mortgage payment might go up and how you can prepare before it happens.
Payment deposit
Margin account used by homeowners to set aside money to pay their property taxes and homeowner’s insurance premium.
After buying your home, you Mortgage The loan servicer will transfer part of your monthly mortgage payment to an escrow account and hold the money for you until your insurance or taxes are due. The amount you pay into your escrow account changes each year based on the cost of your property taxes, the property value of your home, and your homeowner’s insurance premiums.
For instance, if a high school in your county wants to renovate their gym, your tax bill could go up over a certain number of years to fund the project. During this time, the amount you pay into the trust account to pay taxes will increase, which increases your overall monthly mortgage payment.
The same is true if your property’s value increases. When you move into your home, the property’s value may be revalued at a higher rate than the lender anticipates. In this case, the amount in your escrow account may not cover your entire tax bill and you may have to pay the difference out-of-pocket.
Adjustable Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) is a type of market-tied variable-rate mortgage.
Pete Boomer, executive vice president of mortgages at Bank PNC. “Depending on what interest rates are doing, that rate can go up or down, which affects your mortgage payment.”
For example, let’s say you have a 30-year ARM that has a fixed term of 10 years. During the first decade of your mortgage, you’ll pay a lower fixed interest rate. After the initial term ends, your interest rate may increase if the current market rate is higher for the remainder of the loan.
Late fee
Your mortgage lender may charge you a late fee if you don’t make your monthly payments.
Lenders may consider your payment late if it is not processed by the due date, or may give you a grace period of up to two weeks before charging you a late fee. These fees are stated as a percentage of your mortgage payment, typically between 3%–6% of your payment.
For example, let’s say your mortgage payment is $2,000 a month and your late fee is 5% of your mortgage payment. If you miss a payment, your lender may charge an additional $100 for each missed payment.
If your lender allows you to schedule automatic payments, it’s important to calculate your payment processing time to avoid accidentally missing your due date.
Service member benefits
The Military Civil Relief Act (SCRA) was enacted to protect active-duty military personnel from paying high interest rates while they are serving their country.
The SCRA interest rate limit Mortgage loans up 6% annually during active service and for 12 months after their military service. You still have to pay your mortgage payments, but the amount you pay during this time could be reduced if your initial interest rate is higher than 6%.
After the 12 month period expires, you will continue to pay the principal mortgage interest rate and payment. It’s important to note that these benefits do not apply to veterans. If you’re a veteran looking for military benefits to apply to your mortgage, consider considering a loan.
Prepare for increased mortgage payments
Ideally, homeowners are aware at the start of the loan that their monthly mortgage payment could go up—especially if they withdraw their ARM or use an escrow account to pay taxes and homeowner’s insurance. However, other mortgage increases such as late fees can happen unexpectedly, such as if you have a financial emergency.
There are steps you can take to prepare yourself financially if you have to pay a higher monthly mortgage payment.
Talk to your lender. It’s important to stay in touch with your lender so they can keep you informed of possible interest rate changes and how they could affect your mortgage payment before you adjust. that happens.
If you want to withdraw your ARM, your mortgage lender should consider all possible future increase-payment scenarios. This means make sure you can comfortably cover your payments Boomer says every month without sacrificing your current lifestyle.
even though ARM has become more popular among homebuyers If you plan to stay in their home for a short time, it is important to consider whether you can afford the payments in case you are unable to sell your home before the fixed term ends.
Review your budget. If you know your payments may increase in the future, such as in an ARM, or because your estate taxes may increase, you can start budgeting in advance to prepare your finances. .
Ask yourself if you will be Comfortable your mortgage payment if it rises today. Boomer says: If the answer is no, look for ways you can retract discretionary spending.
Reduce your loan amount. Consider putting in a larger down payment to lower your total mortgage—if this is a possibility for you. A larger upfront payment will usually lower your monthly mortgage payment; Saving money each month can help you afford future payments.
“Before you enter into any deal, I strongly recommend you consider the worst-case scenario,” says Boomer. “If your payout goes up, can you comfortably make your payments?”
