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My Mortgage Payment Dropped $150 Per Month

by Ryan Guina

My wife and I got our first mortgage bill for 2008 and our mortgage payment dropped $150 per month! We have a fixed rate mortgage and the lower mortgage bill is a result of a change in our property taxes and an adjustment in our escrow level.

Changes in a mortgage payment are actually not uncommon in the first few years of a mortgage.  The part of your mortgage payment covering principal and interest will not change unless you have an adjustable rate mortgage. However, the portion of your mortgage payment that is held in escrow to cover taxes and insurance is subject to change. Many times the escrow amounts are based on an estimate of expected expenses, and changes in the property’s value or insurance premiums can affect the bill.

How Can Mortgage Payments Change?

Property Taxes – Your property tax payments will change any time the county decides to raise or lower your taxes. In our situation, we remodeled our basement and the county reassessed our home’s value at $30,000 above reasonable market value. We decided to challenge our property taxes and we won. However, our property taxes were already locked in for the year as far as our mortgage was concerned so we paid the higher rate.

We received a refund from the county a few months after we paid our taxes, but it took a few months before the new tax rates showed up on our escrow account. Our mortgage payment was lowered to reflect that change. Next time, I will contact the escrow company myself to make sure they update their books more quickly.

Property taxes are normally adjusted by the county on a periodic basis, but can also change due to homestead exemption, veteran, disability, or other filing exemptions.

Insurance Premiums – Most mortgage bills that have escrow accounts include insurance premiums in the payment. This guarantees the insurance payment is made and protects the lender’s investment in you. Insurance premiums usually don’t have extreme changes from year to year unless you make major upgrades to your property or your land is reassessed for natural disasters such as hurricanes, earthquakes, or flood plains.

Escrow Shortages – We pay our mortgage and property taxes through a mortgage escrow account. Monthly payments to escrow accounts are usually based upon 1/12 of the annual expected charges for property taxes, insurance, and anything else that may be covered. Laws also permit lenders to require additional monthly payments if the lender determines there is a deficiency in the escrow accounts.

This is what happened to us. When our property tax was unexpectedly raised and the escrow service paid the bill, our escrow account was withdrawn under the minimum balance. Our mortgage payment was raised last year to cover that difference (the payment was raised 1/12 of the difference to spread the repayment out over a year). Now that our property taxes are lower, we have sufficient money in our escrow account and we no longer pay the additional charges. Escrow surpluses are required to be returned to the homeowner within 30 days of the period end.

Adjustable Rate Mortgages (ARM) – Some mortgages, such as ARM loans, provide for periodic adjustments to your principal and interest payment amount. Adjustable rate mortgages are not usually a good idea unless you plan on getting a low rate adjustable mortgage for a few years and either selling the house before your rates adjust upward, or rolling that mortgage into a lower fixed rate before the mortgage rates change. Otherwise, you may find that your new interest rate makes your mortgage unaffordable.

Mortgage payments generally remain constant, but be prepared for some fluctuation in the bill. Any time your property taxes or insurance premiums change, you will likely see a change in your mortgage payment. If you aren’t prepared, you could be in for an ugly surprise!

As for our new found wealth? My wife and I haven’t decided yet, but we may continue paying it toward our mortgage for the time being. That will help us reduce our outstanding loan and get our house paid off more quickly. :)


Published or updated August 3, 2011.
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{ 20 comments… read them below or add one }

1 Lynnae @ Being Frugal.net

Yay! It’s always nice when your bills drop!

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2 Frugal Dad

Assuming it holds true all year that will mean an extra $1800. I like the idea of applying that additional $150 to the mortgage.

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3 PT from Prime Time Money

Good deal.

Very informative post.

I say avoid any changes to your actual mortgage payment by getting a fixed rate loan and not escrowing your ins, prop tax, or hoa dues. It’s less convenient paying them all separately, but you’ll have the control and won’t have to worry about their mistakes which cause fluctuations. Plus, you get to keep and earn money on your prop tax money till due.

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4 Ron@TheWisdomJournal

You can also challenge your PMI if the principle you owe is 78% or less than the appraised value of the home.

I’m almost there and plan to challenge mine in a couple of months.

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5 Mrs. Micah

Congrats on your property tax victory. :)

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6 Ryan

Ron, great point. I forgot to mention PMI because we don’t have it.

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7 Ryan

PT, your way is the only way I know to maintain a stable mortgage payment, but it doesn’t change the fact that your property taxes and insurance premiums can still change. So the question really comes down to whether it is worth the hassle of dealing with your own bills in exchange for a little earned interest and fewer fees (if your mortgage agreement will allow you to manage your own; some will not), or just pay the escrow fees and be done with it.

Thanks for the comment. :)

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8 Ryan

Frugal Dad, I like the idea of throwing an extra $1800 per year at our mortgage also. I always round up to the next $50 mark anyway, so that is just adds to it. :)

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9 Ryan

Mark – those tax assessments can be tricky. There is no way to plan for the county changing your home’s classification. I hope it works out a little better next time!

I agree, current rates are nice. If you aren’t sure you can afford the 15 year mortgage, you can always go with the 30, and pay extra. You may have a slightly higher interest rate, but you will still pay the loan off sooner. :)

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10 Mark Framness

Luck You,

Since the wife and I have been paying prop taxes our escrow obligation has gone up & up.

The first year they underestimated somewhat so not only did we have to pay more to cover the larger than expected tax bill but then we had to cover the shortfall.

Then the town comes & reappraises our lot from farmland to residential. WHHHOOOOOAAAAAA, we really got hit on that one. This year, taxes comes out of our pocket as our escrow balance was refunded to us when we closed on the construction loan (I deliver that check in a couple of days).

Hehehehe, I am not looking forward to next year’s tax bill. Thank the Lord for falling 30 year rates, heck it is even tempting to jump into a 15 year loan.

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11 Mark Framness

That was the track we are probably going to take, get into a 30 year loan. After all, for most conventional loans minimum payments are just that minimums — there is nothing holding one back from paying extra.

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12 LDG

Thought this might be a good place to ask— my bill doesn’t change- but the amount that is principle vs interest seems to fluctuate. should it? and what is changing month to month. It is a fixed rate loan that goes to adjustable after 5 years (plan to sell or refinance before then).

any info is great-
thanks

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13 Ryan

Hello LDG,

When you have a fixed rate mortgage (or any fixed rate loan), the principle vs. interest generally changes a slight amount every month. The reason is that as you pay down your mortgage, the principle (the amount you owe the bank) decreases. Then every month you make a payment, you are paying interest on less principle.

The lower you pay your mortgage, the amount that goes toward your principle every month increases and you pay less interest. Increasing your mortgage payment by even $50/mo. can dramatically reduce the length of your mortgage because the extra funds go directly to the principle, again, lowering the amount of interest you are paying.

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14 Donald

We refinanced our mortgage last year and just realized, thanks to a 1099 form, that our bank is paying us 2% on our escrow account. This is apparently mandated by a New York State law enacted years ago when 2% was considered the bare minimum rate. (I am embarrassed that I had not read the mortgage agreement carefully enough to have been aware of this beforehand, and this increases my degree of sympathy for the many people who have been surprised by unpleasant details of their sub-prime or adjustable rate mortgages.) Anyway, I would like to know if there is any means of taking greater advantage of this 2% rate. For one thing I think I should start sending my monthly payment in earlier rather than later in the month. Is it also possible to send in extra funds to the escrow account in order to earn even more? Will the bank refund the excess annually, right away or just apply it to the principal? I suppose I won’t really know until I try it!

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15 Gail Malinowski

I had my mortgage sold to OCWEN from GMAC. They just kicked up my mortgage escrow by $150.+ per month. I called and they said the escrow was short after the last payment and put me in a negative, so they had to raise it to make up the difference by four months. They also said that the normal practice is to escrow an extra four months incase taxes go up. That’s not right I thought it was only 1/6th they could budget over. I figured that after the next escrow payment in February 2014 there will be an overage of $2,180.00. They better refund that overage!

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16 Ron Russell

My lender (who purchased my mortgage) wishes to increase my mortgage an additional $100 per month over the projected $30 per month increase (to cover projected 2014 Taxes and insurance) to attain the 1/6 cushion allowed by RESPA. The alternative is for me to pay $1200 up front so my monthly mortgage will not increase $100 per month. This addiitonal $100 for a “cushion” is very steep for me and lender won’t budge.

Am I in default of my loan and would my credit be hurt if I simply decide to pay on a monthly basis my principle and interest plus the projected monthly escrow amount that is to cover my Insurance and taxes in 2014. Essentially, I would not be contibuting only to the “cushion”

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17 Ryan Guina

Ron, I don’t have a firm answer for you. I recommend asking a real estate lawyer for more information in this situation. Best of luck!

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18 Joretta Fullington

Just received an escrow overpayment and changed to a lower insurance company, which is a Nationwide company, Farmers! I received from my old home insurance a check for over $700. I’m trying to figure how much to pay to the mortgage. All of the extra? We could really use some home repairs!

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19 Ryan Guina

Joretta, I would contact your mortgage company and escrow compamny to determine what your new mortgage payment should be. If the $700 is simply a refund from your escrow account and you have the choice to use it as you please, then there is no need to make an extra mortgage payment. Using it on home repairs would be a good use for it. Where you want to be careful is with your new mortgage payment – sometimes the escrow amount gets messed up when insurance companies are changed. You want to contact your escrow company to ensure you won’t go into arrears. Otherwise they may increase your mortgage payment to make up the shortage.

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20 Joretta Fullington

Ryan,
Thank you for your prompt response. I was going to try to crunch some numbers on the breakdown on the Mortgage breakdown, but I believe the your right and the best thing to do, is to call the Mortgage company and find out for sure!

Sincerely and GOD Bless you and your Family,
Joretta

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