When you signed the papers on your fixed-rate mortgage, you likely thought you were committing to a set payment for the life of the loan. Unfortunately, even if you intentionally steered clear of adjustable-rate mortgages and you tried to stay true to the monthly mortgage payment your budget would allow, you could still be in for a price creep.
Before this information sends you into a doomsday spiral, read on. Knowing the reasons behind a possible uptick in your mortgage payment can help you plan for it or solve any issues now that could cause this problem in the future.
The ins and outs of escrow accounts
If you borrowed more than 80% of the value of your home, many lenders will require you to establish an escrow account. On top of your monthly mortgage payment, the lender will collect an estimated monthly amount to cover your property taxes, homeowners’ insurance, private mortgage insurance, and homeowners’ association dues (if applicable) for the year. The funds will be held in the escrow account until the bills become due.
For the homeowner who has trouble saving throughout the year for these large bills, escrow accounts can be a huge help. However, because they break down these expenses and add them to your mortgage, what’s going on with your escrow account behind the scenes can be the reason your monthly payment increases.
Reason #1: Property taxes
Property taxes, especially in expensive areas, can place a significant cost burden on homeowners — and they can fluctuate wildly due to a variety of factors. Home improvements, rising property values, and government need can all lead to a price increase.
When this increase occurs, lenders must begin collecting a larger monthly amount in the escrow account to cover the total estimated cost. Since the additional funds being funneled into this account are collected in one lump-sum amount with the mortgage payment, the total monthly cost will rise as a result.
Rising property taxes can be disputed by filing an appeal for a lower assessment amount, but there are no guarantees that the ruling will land in the homeowner’s favor.
Reason #2: Homeowners’ insurance
In addition to setting up an escrow account, financing a mortgage means homeowners’ insurance will be a requirement.
Making improvements such as finishing a basement, building on additional square footage, or upgrading existing elements within the home to increase its overall value will also cause a rise in homeowners’ insurance costs. Just like the jump in property taxes, this increase will show up in the amount collected for the escrow account.
Reason #3: Lender error
While it’s usually done completely innocently and as the result of simple human error, sometimes lenders miscalculate the monthly property tax and insurance escrow payments needed to cover the annual total.
Unfortunately, it is the homeowner who has to shoulder the expense of these miscalculated payments, sometimes resulting in a steep increase in monthly costs. After all, property taxes and insurance costs must be paid in total — regardless of what the homeowner believed the cost to be.
To avoid this rude awakening and an increase that could potentially make your home unaffordable, ensure all estimated costs have been thoroughly checked and budget in a cushion to your anticipated monthly mortgage payment. This will ensure that any increase will be seen merely as a hiccup and not a reason to go into full-on panic mode.
Kayla Albert is a social media specialist, word smith, and proud Colorado native. Her work has appeared in The Denver Post, Lifehacker, Tiny Buddha, and more. She believes in empowering others to create their best life possible — whether that’s through positive thinking or taking steps to build a solid financial foundation. You can find her at kaylaalbert.com.
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This blog was posted on September 1, 2015 on www.agentrising.com