Going through some of the recent search terms that have brought people to PIAC, one inquiry stood out from the rest.
Sadly, I’m pretty sure that all of the folks that have stumbled upon this site looking for the answer have left empty handed wondering why they just wasted a few seconds of their life on a goofy site called something like “Pig in a Pan”.
While I’m sure that I’ve tiptoed around the perimeter of the answer in my PMI and Homeowner’s Insurance posts, I’m not certain that I’ve ever actually just flat out answered the question: Why did my fixed rate mortgage bill go up?
The answer lies in the escrow account set up, usually at closing, by the mortgage company you hold your mortgage with.
Money held in the escrow account is paid by the lender on your behalf. Things like property taxes, homeowners insurance, and private mortgage insurance (ugh!) are the main things paid out of the account.
So, while the principle and interest portion of your mortgage is “fixed”, the escrow portion is not.
Well, it often varies from year-to-year because tax assessments and insurance premiums bounce around from year-to-year. Usually they go up, right? Taxes always seem to go up.
The cool part in the case your taxes go up, or whatever, is that the lender will typically cover any shortfalls in the escrow account. That is, until they can adjust your monthly payment — which they call an escrow analysis which is usually done annually, often the same month that you originally took on the mortgage.
As a real world example, when I first took on my mortgage in 2002, my “fixed” monthly payment was somewhere around $1100 per month.
But one month in to the mortgage, Allstate Insurance dropped my homeowners policy. Behind property taxes, the largest chunk of my original “escrow account” was based on Allstate’s homeowners insurance premium.
As I scurried to find replacement coverage I quickly learned that homeowner’s insurance premiums can vary widely. With Allstate, my yearly premium was around $450. On the Fair Plan, which I was forced to resort to, my premium was nearly $1000. Over double.
Now for the next 11 months, my mortgage payment remained at the original $1100. Unbeknownst to me, at the time, my mortgage company was covering the shortfall in my escrow account.
Then came the mortgage company’s annual escrow review on my account 12 months after I had moved in. My next mortgage bill was around $1350?!
At first, having grown accustomed to paying $1100 each month, I was flabbergasted. How could this be? How could they raise my monthly bill by over $250. This was a fixed mortgage! They couldn’t do that, could they?
To get my answer, all I had to do was read page 2 of my mortgage statement. It took me nearly a week to do this — I’m embarrassed to admit. The additional $250 was to cover the shortfall from the year before and also to ensure that they wouldn’t have to “spot” me the difference in the following year. Make sense?
That second year was rough. It wasn’t in my budget to have a $1350 mortgage payment.
That’s why it was a pleasant surprise when, 12 months later, my mortgage bill went down to $1200. This was because I was no longer covering a shortfall from the previous year.
Still, it was more than my original mortgage bill but less than what I had been paying. The quick up and then down experience in the first two years of my mortgage made it all click for me.
Hopefully this example helped it click for you too!
As a side note, for most folks, the insurance premium stays pretty constant, it’s the tax assessment that gets you…
For the past 4 years running, it’s been a series of tax hikes that have kept my bill going higher and higher…