Rising rent prices are leading some to bank on the fact that mortgage payments never go up each year. But is that myth actually true?
When I rented apartments, the largest monthly rent increase I faced was about $20 per month. I considered it highway robbery. For the last year I was under a lease, before the pandemic began, the landlord wanted to increase the rent by $65 per month. I told them I was going to have to research other places and they came back with a $5 increase instead. But since the pandemic, some renters have faced leases with monthly increases of hundreds of dollars. This, understandably, leads some to believe it’s time to buy, since they accept the myth that mortgage payments don’t rise year after year.
In some ways, they’re correct. But in other ways, it’s important to keep in mind that monthly mortgage payments actually can rise every year, even though you don’t have a “greedy landlord” pulling those strings.
A couple of factors are in play here. You have to understand how a mortgage payment breaks down.
Mortgage payments don’t only cover the home loan.
This is the little detail many people don’t seem to know, but that lack of understanding can cause some unwelcome surprises.
Your monthly mortgage payment does pay down the home loan, of course. But the lender will likely include a few other important things in that monthly amount.
If you pay less than 20% of the home’s selling price as a down payment, you’ll face annual mortgage insurance. That protects the lender in case you default on your loan. The lender takes the annual premium for your mortgage insurance policy, divides it by 12 and adds that amount to your monthly house payment.
Your lender will almost certainly require you to have homeowner’s insurance on the home. Again, this protects the lender, although it protects the homeowner as well. The homebuyer can shop around and find the most affordable options that fit their needs and the lender’s requirements. The lender then looks at the annual premium, divides it by 12 and adds that amount to the monthly payment.
You can count on taxes. Your lender looks at your property tax, and again adds 1/12th of that annual tax bill to each month’s payment.
Individual increases can raise your mortgage payment.
Every year, your bank will send you a revised statement showing what your new monthly mortgage payment amount will be for the next 12 months.
This time last year, I nearly had a stroke when I read my bill: my mortgage was going to go up about $250 per month in addition to a payment of something like $1,400 I had to make right away.
It turned out to be a clerical error, but let me explain: my homeowner’s association failed to update their insurance policy information for my building. So my lender assumed that it was no longer carrying insurance. As a result, my lender, without consulting me, selected coverage they expected me to pay for.
Tax bills and homeowner’s insurance are billed annually. But homeowners pay 1/12th of the annual bills a year in advance based on the previous year’s bills. That portion of the bill goes into a special account, call escrow, that the bank holds for you. When those bills come due, the bank pays them for you with the money you’ve put in that account.
When the bank sends that annual statement, they do the best they can to approximate exactly what those bills will be. Since the bank added on that extra insurance, the escrow account went into the red because that wasn’t a bill I paid the year before.
Long story short, I raised hell, the bank and the homeowner’s association got their acts together and the mistake was corrected.
But those figures can drive up your mortgage payments.
If your property taxes go up, and they often do, that could increase the amount you’re sending to that escrow account. That means your monthly mortgage payments would increase by that 1/12th of the higher tax bill.
If your homeowner’s insurance goes up, that will likewise increase the amount you’re paying each month. Whatever 1/12th of the new annual premium becomes, you can count on that amount being part of what you have to pay.
If both go up, naturally, you’ll pay that much more per month.
If either actually decreases — either through a decrease in property tax or a decrease in homeowner’s insurance cost — you could owe less per month.
That actually happened this year. My insurance carrier decided to give me a nice little discount for being a responsible consumer. I don’t know why it dawned on them this year that I was suddenly responsible any more than I had been the year before. I was responsible last year, too. Regardless, that discount accomplished two things: First, my bank dropped my mortgage payment for the next year, based on the new 1/12th of the new premium. Second, since the premium dropped, my escrow account now had a little surplus. So the bank actually sent me a check for the surplus!
You might ask why the bank didn’t just keep that surplus in the escrow account so that it was there in case, say, the homeowner’s insurance or property tax went up next year. Banks don’t seem to think that way.
But I do. I put that surplus in the bank account from which I pay my mortgage payment every month. It’s there waiting for just such an emergency in 2023, though I hope I won’t need it.
Sooner or later, I will.
Don’t have a fixed-rate mortgage? That could change things, too.
Certain types of mortgage loans look attractive because they feature lower payments — at least at first. Variable-rate mortgages start with a low interest rate. But at a certain point, that interest rate jumps up.
If interest rates drop, your monthly mortgage payment could drop. But if interest rates increase, your payment increases.
What’s particularly tricky, though, is that some mortgages of this type, known as adjustable-rate mortgage loans, might have payments that fluctuate. Unlike the fixed-rate mortgage, which locks in a specific interest rate for the life of the loan a homeowner can budget around easier, ARMs could have mortgage payments that increase to the point that the homeowner can’t afford them.
Do you belong to an HOA? That’ll go up, too.
If you belong to a homeownership association, the dreaded HOA, you have to pay dues each month. Those dues will likely go up each year. Though you generally don’t pay HOA dues as part of your mortgage payments, those dues are required, so you almost have to think of it as part of what you’d otherwise pay in a rent bill.
Some HOA fee increases are modest while others are far from modest. In any case, they definitely add to the monthly commitment homeowners have to pay.
So can your mortgage payments stay the same year after year?
Sure, it’s possible. But it’s not likely. For your mortgage payment amount to stay the same for years on end, you’d have to have a fixed-rate mortgage and property tax that doesn’t increase and homeowner’s insurance that doesn’t increase.
If you count your HOA dues as part of your home cost, that’d have to stay the same year after year as well.
Yes, it’s possible, but that’s not likely to happen.
The good news, however, is that while mortgage payment amounts can increase year to year, from what some people saw since the pandemic, they usually won’t go up as quickly or as sharply as rent prices have.
That might be a good reason to consider buying, but just be careful to research mortgage options, property taxes, insurance plans and whether your new home is part of an HOA. The more you know before you make your decision, the better you’ll be able to plan for unexpected expenses.