Fixing your mortgage locks in the interest rate, which means that your monthly payment of principal and interest never goes up. However, your mortgage payment represents more than the cost of your loan. Lenders commonly collect an amount to cover property taxes and homeowner insurance premiums in addition to your loan principal and interest. Fluctuations in these costs may increase your monthly repayments.
TL;DR (Too Long; Didn't Read)
Mortgage payments that include insurance and property tax escrows can increase when insurance premiums or property taxes increase. This is true even if the mortgage's interest rate is fixed.
Understanding How Escrow Works
Mortgage lenders loan you money against the collateral of your house. If you fall behind on your repayments, your lender has the right to sell your house to pay off the outstanding debt. Therefore, lenders protect their interests by making sure that the taxes on the property are paid and that your home is properly insured. Your lender estimates the annual tax and insurance cost for your home and spreads this amount over 12 months, adding the installments to your monthly loan payment. The money goes into a special account -- known as escrow -- to pay the tax and insurance bills when they arrive.
Routine Escrow Analysis
Local governments periodically reassess entire neighborhoods, which may raise your property taxes. Your homeowner insurance premium may also rise, particularly if you upgrade your home or make a claim. Lenders deal with price fluctuations through an exercise known as "escrow analysis." At the end of the year, your lender checks whether the money you pay into escrow still covers your tax and insurance bills. If it does not, your lender recalculates your escrow payment. At this point, you may see your monthly mortgage payment go up.
Escrow Analysis Statement
If your insurance or property taxes go up before the lender undertakes a year-end escrow analysis, your escrow has a shortage. Your lender still pays the bills but adds the shortage to your escrow payment for the following year. This brings your escrow account current but increases your monthly payment. The Real Estate Settlement Procedures Act requires your lender to send you an annual Escrow Analysis Statement showing payments in and out of escrow over the course of the year. If you prefer, you can pay off the shortage when you receive your statement.
Other Causes for an Increase
If your escrow is not causing your payment hike, check whether your lender has assessed you for fees that affect your monthly payment. If no fees are added to your account, your lender may have made a mistake. Write to your lender and ask for an explanation why your loan payments have increased.
A former real estate lawyer, Jayne Thompson writes about law, business and corporate communications, drawing on 17 years’ experience in the legal sector. She holds a Bachelor of Laws from the University of Birmingham and a Masters in International Law from the University of East London.