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.