Why did my payment go up when I have a fixed rate?

This is a common question from customers when they receive notice of a change in their house payment.  The increase is due to changes in other amounts included in your total payment. Your total house payment includes:Picture1

 

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.

How is the monthly tax payment calculated in the first place?

Your lender will get 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 twelve to determine the monthly amount included in your monthly total payment. Think of this like a monthly installment that goes 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, 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 amount collected so far is typically not enough to cover the new bill. The lender will pay the total tax bill from your account automatically to ensure the taxes are paid on time, even if there isn’t enough in the account. This is the tricky part: the lender needs to recoup the money they 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 the lender had to pay is called a “shortage.” When there is a shortage in the escrow account, the lender will give you a few options to get the account built back up again. Union Home Mortgage gives you the choice to pay the full amount of the shortage or roll it into your monthly payment. UHM also gives you the choice to blend an upfront amount with an amount added to your payment. When it comes down to it, most borrowers tend to just roll it in with their monthly payments.

Should I pay the shortage in full or roll it into my payment?

If you elect to pay the shortage in full then your monthly payment will not increase as much. This is a good option if the shortage due is an amount you can afford to pay and you prefer to keep your house payment as low as possible. If you decide not to pay the shortage in full, the lender will divide 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 twelve and added to your total payment. Keep in mind this is because your city or town increased the property taxes, not because the lender is imposing any fees.

Does this mean the lender made a mistake in managing my escrow account?

In this example, the lender did not make a mistake. Lenders must follow federal and state regulations when managing your escrow account. The law puts a cap on how much the lender is allowed to hold in the account. Generally, the accounting rules cause the account to have very little cushion to handle any increase in the bills being paid out of the escrow account.

Is this too much to handle?

If the new payment and or shortage present issues or your statement is confusing, you should call your lender immediately! The best thing to do is review the options and be sure you understand what is causing 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 to understand the way money goes in and out of the account throughout the year. This will help you prepare in the event your tax or insurance bills increase in the future.

If you have any further questions about this process or about your mortgage in general, please contact our customer service number (855) 622.3196 today!