3 reasons why your mortgage payment might increase next year
Many homeowners think that the amount settled on at closing will be it for the duration of the mortgage, but that isn't the case. At least not most of the time. There are actually several factors that can contribute to a higher monthly mortgage payment.
Speaking to this issue, my mother called me the other day to ask me about the new amount required for the mortgage on her home. Her mortgage payment increased, and she wasn't very happy about it. There are a few reasons why this can happen, and many homeowners aren't prepared when the new amount causes a shortage in their escrow account.
1. Increase in property taxes
Unbeknown to many new homeowners, property taxes tend to fluctuate, especially in a rocky real estate market. While your property values may have gone down, don't be surprised if your property taxes go up because that does happen. Many municipalities don't follow the common sense rule of reducing the property tax with the lower tax assessment. Some will actually raise taxes to make up for any short falls in the budget due to many homeowners defaulting on taxes and other municipal obligations.
2. Adjustable rate mortgage increase
This is often the reason for the largest increase in the total mortgage amount. It's important that you understand upon closing the type of loan that you have. Some loans adjust monthly and others at the end of a specified period of time ie 1,3,5,7 years etc. So you can either plan for the increase or you can refinance out of an adjustable into a fixed rate loan where the note is set for the life of the loan.
3. Homeowners insurance increase
This type of increase typically happens after your renewal comes around and you have a claim in your previous year. In my experience, once we made a claim against the policy, the renewal came around with an increase, which forced me to switch companies. This is also why so many homeowners refuse to make a claim because they know that the renewal will come with a rate increase they aren't prepared to pay.
If you're in the market for a new home, make sure that you account for potential increases in your mortgage payment such as the increase in property taxes, adjustable rate mortgage and homeowner's insurance. If you have the unlucky fortune of all three hitting you at once, then it may be time to shop around for lower rates. Talk to your bank about ways to reduce the amount via refinance or recommendations around a new homeowner's insurance company. Unfortunately, there isn't much we can do about property taxes unless there's an abatement in place to help struggling homeowners.