Why Do My Mortgage Payments Go Up Every Year When I Have Fixed Rate Mortgage?

Fixed Rate, Variable Costs: Escrow’s Impact on Mortgage Payments

If you’re a homeowner, you may have noticed that your mortgage payment isn’t always the same each year, even if you have a fixed-rate mortgage. For many, this can come as a surprise, especially if they expect their monthly payments to remain steady over time. However, increases in mortgage payments are typically driven by changes in your escrow account, which is used to pay property taxes and homeowner’s insurance. While your mortgage principal and interest may stay the same with a fixed-rate loan, the components related to taxes and insurance are more variable and usually go up each year, impacting your monthly payment.

Let’s dive into how this works and what you can do to manage it.

What is Escrow?

First, let’s look at what escrow is in the context of mortgage payments. When you make a monthly mortgage payment, it usually includes several components:

• Principal – The portion of the payment that goes toward reducing your loan balance.
• Interest – The charge for borrowing the funds, based on your interest rate.
• Taxes and Insurance – This is where escrow comes in. A portion of your payment is set aside in an escrow account managed by your lender to cover property taxes and homeowner’s insurance.

An escrow account is essentially a savings account that holds the funds needed to pay your annual property taxes and insurance premiums. Your lender collects money each month as part of your mortgage payment and deposits it into your escrow account. When these expenses are due, your lender uses the escrowed funds to make the payments on your behalf. By collecting these funds gradually over the year, escrow helps to avoid a situation where you’re required to pay a large lump sum when taxes and insurance are due.

Why Do Mortgage Payments Increase?

In most cases, the reason for an increase is related to property taxes and insurance premiums, which often rise over time.

Property Taxes

Property taxes are one of the primary drivers behind an increase in mortgage payments. Tax rates are set by local governments and are typically based on the assessed value of your property. Here’s why they go up:

• Property Value Increases: When your home or surrounding properties increase in value, your local government may reassess the value of your home and raise your property tax accordingly.
• Higher Tax Rates: Sometimes, local governments increase tax rates to fund public services, infrastructure, or schools. Even if your property value stays the same, an increase in the tax rate can result in higher property taxes.

It’s important to remember that you don’t have much control over how much property taxes will increase year over year. Even modest annual increases can add up over time, and with higher assessed property values, this means the escrow portion of your mortgage payment may increase significantly.

Homeowner’s Insurance

The other significant component of escrow is homeowner’s insurance. While property taxes are set by the government, insurance premiums are determined by private insurance companies and can vary based on a number of factors:

• Market Conditions: If the insurance industry is experiencing a rise in claims due to natural disasters, inflation, or other economic factors, insurance companies may increase premiums across the board to cover these additional expenses.
• Coverage Adjustments: Over time, you may need more coverage due to home improvements, inflation, or changes in insurance requirements from your lender.
• Local Risks: If your area has seen an increase in natural disasters like hurricanes, wildfires, or floods, insurance premiums may rise in response to this higher risk.

Just like property taxes, these increases in homeowner’s insurance premiums will contribute to higher monthly mortgage payments, even when your principal and interest remain unchanged.

How Escrow Changes Impact Your Monthly Payment

When property taxes and insurance premiums increase, your lender will adjust your escrow payment to ensure there are sufficient funds in the account to cover these costs for the following year. Here’s how the process typically works:

• Annual Escrow Analysis: Once a year, your lender conducts an escrow analysis. They review your property tax and insurance costs, compare them to the funds in your escrow account, and determine if you have a shortage (or surplus) of funds.
• Escrow Shortages: If your taxes or insurance premiums have increased, there may not be enough in your escrow account to cover these expenses, resulting in a shortage. Your lender will address this shortage by adjusting your monthly mortgage payment for the upcoming year.
• New Payment Amount: To make up for the shortage and anticipate future increases, your lender will likely increase your escrow payment, causing your total monthly mortgage payment to go up. In some cases, lenders may also give you the option to pay the shortage as a lump sum, allowing you to keep your monthly payments lower.

What You Can Do to Manage Escrow Increases

Although you can’t always avoid escrow increases, there are steps you can take to better manage your mortgage payments and anticipate potential changes:

Stay Informed About Local Tax Rates

Knowing when and how your property will be reassessed can help you anticipate increases in property taxes. You can contact your local tax assessor’s office or check their website for information about assessment schedules and rate changes.

Shop for Homeowner’s Insurance

Homeowner’s insurance premiums can vary widely between providers. If your premium has gone up significantly, consider shopping around for better rates. You may find a different policy that offers the same or better coverage at a lower price.

Maintain Your Property

Insurance premiums can sometimes be affected by the condition of your home. By keeping your property well-maintained and addressing any issues that could lead to costly insurance claims, you may be able to avoid premium increases related to your property’s risk profile.

Budget for Escrow Adjustments

Since increases in property taxes and insurance premiums are common, it’s wise to budget for a potential increase in your mortgage payment each year. Building this into your financial planning can help you absorb any adjustments without disrupting your budget.

Consider Paying Escrow Shortages as a Lump Sum

If you have an escrow shortage, paying it as a lump sum can help keep your monthly payment more manageable. This may be a good option if you have savings set aside and want to avoid a monthly increase in your mortgage payment.

About Us

At Innovative Mortgage Brokers, our mission is to make the mortgage process as clear and straightforward as possible. With years of industry experience and a commitment to client satisfaction, we specialize in helping borrowers navigate their mortgage journey with ease, offering tailored solutions for both residential and small commercial properties. Based in Pennsylvania and also licensed in Florida, our team is dedicated to providing transparent, responsive service that prioritizes your goals and financial needs.

We believe in educating our clients every step of the way, ensuring you understand not only the mortgage products available but also the factors that can impact your payments over time. By working with a wide network of trusted lenders, we’re able to match you with competitive loan options designed to meet your specific circumstances, whether you’re a first-time homebuyer, a seasoned investor, or a business owner seeking commercial property financing.

At Innovative Mortgage Brokers, we’re more than just your mortgage advisors – we’re your partners in building a secure financial future. Reach out today to see how our expertise, dedication, and personalized approach can make a difference in your mortgage experience.

Final Thoughts

While it may feel frustrating to see your mortgage payment go up every year, understanding the reasons behind these increases can help you plan and manage your finances more effectively. Escrow accounts are a valuable tool that helps homeowners budget for property taxes and insurance premiums, but they also reflect the reality of rising costs over time.

If you’re concerned about your mortgage payment or have questions about your escrow account, reach out to our team at Innovative Mortgage Brokers. We’re here to guide you through the ins and outs of your mortgage and provide strategies to make homeownership as stress-free as possible. By understanding the factors that impact your mortgage payment, you can feel more confident and prepared to manage the financial side of owning a home.