Why Is My Mortgage Payment Increasing? Understanding Escrow & Property Taxes
Few things generate more questions from homeowners than receiving a notice that their mortgage payment is increasing. For many borrowers, the first reaction is confusion. After all, if you have a fixed-rate mortgage, shouldn’t your payment stay the same?
The answer is: sometimes yes, and sometimes no.
Let’s break down the most common reasons your mortgage payment may increase and what you can do about it.
First, Understand Your Mortgage Payment
For many homeowners, the monthly mortgage payment consists of four parts:
- Principal (repayment of the loan balance)
- Interest (the cost of borrowing money)
- Property Taxes
- Homeowners Insurance
The last two items are often collected through an escrow account, which is managed by your mortgage servicer and used to pay taxes and insurance bills as they come due.
While the principal and interest portion of a fixed-rate mortgage generally remains unchanged, property taxes and insurance premiums can change from year to year.
And when they do, your monthly mortgage payment may change as well.
Escrow Is Usually the Reason
The most common reason for a mortgage payment increase is an escrow adjustment.
Every year, your mortgage servicer performs an escrow analysis to compare:
- What was collected into the escrow account
- What was paid out for taxes and insurance
- What is expected to be paid during the coming year
If property taxes increased, insurance premiums increased, or both, additional funds may be needed to ensure enough money is available when those bills become due.
When that happens, your monthly payment may increase.
Why Did My Property Taxes Increase?
Property taxes are determined by your local taxing authority, not your mortgage company.
Common reasons include:
- Increases in local tax rates
- Property reassessments
- New construction or home improvements
- Expiration of tax credits or exemptions
Many homeowners are surprised to learn that even when their mortgage interest rate remains unchanged, rising property taxes can significantly affect their monthly payment.
Why Did My Homeowners Insurance Increase?
Insurance costs have risen substantially across many parts of the country in recent years.
Premium increases may be caused by:
- Inflation and higher repair costs
- Claims activity in your area
- Changes in coverage requirements
- Carrier pricing adjustments
- Rebuilding cost increases
Because insurance premiums are often paid through escrow, these increases are frequently reflected in the monthly mortgage payment.
What Is an Escrow Shortage?
An escrow shortage occurs when the escrow account contains less money than required to pay upcoming tax and insurance bills.
This often happens when:
- Taxes are higher than anticipated
- Insurance premiums increase unexpectedly
- A prior year’s projections were lower than actual costs
When a shortage exists, borrowers are typically given options to either:
- Pay the shortage as a lump sum, or
- Spread repayment over future monthly payments
The specific options available may vary depending on the loan and investor requirements.
If I Pay the Escrow Shortage, Will My Payment Go Back Down?
This is one of the most common questions we receive from homeowners.
In most cases, the answer is no.
Let’s use a simple example. Assume your property taxes and homeowners insurance increased by a combined $1,200 during the year. Because your escrow account did not collect enough funds to cover those increased expenses, an escrow shortage was created.
When your escrow analysis is completed, two things happen:
First, the shortage must be repaid.
Second, your future escrow collection amount must increase to account for the higher tax and insurance bills going forward.
Many homeowners choose to pay the shortage in a lump sum, which can help reduce the immediate increase in their monthly payment. However, even after the shortage is repaid, the underlying tax and insurance bills are still higher than they were previously.
Think of it this way: paying the shortage resolves yesterday’s problem. Increasing the escrow collection amount helps prepare for tomorrow’s bills.
Unless your taxes or insurance premiums decrease in the future, your payment will generally not return to its previous amount simply because the shortage was paid.
What If I Have an Adjustable-Rate Mortgage?
While most borrowers have fixed-rate mortgages, some loans have adjustable interest rates.
With an adjustable-rate mortgage (ARM), the interest rate may increase or decrease according to the terms of the loan agreement. If the interest rate changes, the principal and interest payment may change as well.
Your mortgage documents outline when and how rate adjustments can occur.
Review the Notice Carefully
If you receive a notice that your payment is changing, take a few minutes to review it.
Look for:
- Changes in property taxes
- Changes in insurance premiums
- Escrow shortages or surpluses
- Any changes in your interest rate
In many cases, the notice will clearly explain why the payment changed and how the new amount was calculated.
Questions? We’re Here to Help.
A higher mortgage payment can be frustrating, especially when it arrives unexpectedly. The good news is that payment increases are often tied to changes in property taxes, homeowners insurance premiums, or escrow requirements rather than changes made by your mortgage company.
If you receive an escrow analysis or payment change notice and aren’t sure what it means, don’t guess. Our team is happy to walk through the details with you, explain what changed, and answer any questions you may have.
At Union Savings Bank, we believe understanding your mortgage should not be complicated.
Contact our Escrow Department:
Phone: (513) 247-0303
Email: [email protected]
You can also find answers to many common mortgage servicing questions in our online FAQ section and customer resources available at Union Savings Bank.
Whether you have questions about escrow, taxes, insurance, principal payments, or your monthly mortgage payment, we’re here to help throughout the life of your loan.