I have a fixed-rate mortgage; why did my payment go up?
This is a common question from customers when they receive notice of a change in their house payment. The increase in your payment is due to changes in other amounts included in your total payment. Let’s break it down into small chunks:
If you have a fixed-rate loan, your P&I (principal and interest) payment, will remain the same for the entire term of the loan. However, the monthly deposit set up for your taxes, insurances and/or association dues, as applicable, will change when there is a change in the total tax bill or premium due during the year. The most common reason for an increase in your payment is caused by a property tax increase.
Back up a minute: How is the monthly tax payment calculated in the first place?
Your lender gets the tax amounts from the county, city, township and any other municipalities who charge taxes on your property. The total of all taxes due, during the calendar year, is divided by 12 to determine the monthly amount included in your monthly total payment. Think of this like a monthly installment toward the total tax bill when it’s time to pay it. These amounts are deposited each month into an escrow account set aside in your name.
If any of the tax amounts increase, however, the monthly amount needed each month for your escrow account will also increase. This is because there needs to be enough money in the account to pay the bill. The good news is the monthly amount can decrease if the tax decreases!
What exactly happens if the property tax increases?
Tax bills usually increase midway through the year. Therefore, the amounts collected so far are typically not enough to cover the new bill. Your lender pays your total tax bill from your account automatically to be sure the taxes are paid on time, even if there isn’t enough in the account. This is the tricky part. Your lender needs to recoup the money we paid in advance and also start collecting for next year’s bill that will be higher. The difference between the amount in your account and the amount your lender has to pay is called a ‘shortage’. When there is a shortage in the escrow account, you have a few options to get the account built back up again. You can choose to pay the full amount of the shortage or roll it into your monthly payment. You could also blend an upfront amount with an amount added to your payment.
Should I pay the shortage in full or roll it into my payment?
If you elect to pay the shortage in full your monthly payment won’t increase as much and you can keep your house payment as low as possible. If you decide not to pay the shortage in full, your lender divides this into your future monthly payments, causing an increase in the total payment. You will also see the new increased tax bill amount divided by 12 and added to your total payment. If this feels like double the increase, you are correct. Keep in mind this is because your city or town increased the property taxes, not because your lender is imposing any fees.
What if this is too much to handle?
If the new payment or the shortage presents issues or your statement is confusing, you should call our customer service number at 855-622-3196.
Review your options with your loan officer to understand what caused the change. Even if you don’t owe any extra money, it is best to review your escrow account statement with your lender at least once a year. Be sure you understand the way money goes in and out of the account. This will help you prepare in the event your tax or insurance bill increases in the future.