Lew Sichelman
If you have a fixed-rate mortgage, your payments will always stay the same, right? Wrong.
Maybe you’ve heard the term PITI, which stands for the main components of a typical mortgage payment: principal, interest, taxes and insurance. And while the “P” and the first “I” won’t increase in a fixed-rate loan, the “TI” – your property taxes and homeowner’s insurance – most assuredly will.
If you are like the roughly 80 percent of borrowers who pay all four PITI elements together on a monthly basis, then your monthly payments are almost guaranteed to go up – possibly substantially.
Lenders (or the loan servicers who administer mortgages on their behalf) hold that money in escrow accounts, aka impound accounts. Based on previous bills, they estimate how much you’ll owe for taxes and insurance over the course of the next year. Then they divide that amount by 12 and add it to your monthly payment.
Actually, servicers are allowed to hold up to 14 months’ of tax and insurance funds in escrow, but you get the point: When those bills come due, the funds are there, ready to be disbursed to the tax man and insurance company.
The other option is to go without an escrow account and hope you have the money on hand when those bills arrive in your mailbox. But if you haven’t been putting away something every month like clockwork, you could be hit with huge bills you’ve all but forgotten about – and may not be able to handle.
Worse, taxes and insurance premiums invariably rise – which means your house payment does, too, whether you have a fixed interest rate or not.
Many Borrowers Fooled
That fact fools many borrowers, according to a survey by LERETA, which provides tax and flood data to financial service companies. More than a third of the 1,000 respondents with fixed-rate mortgages think their payments can never change, and more than half who experienced an increase in their monthly payments were surprised by the amount.
LERETA decided to conduct the poll because 60 percent of the inquiries to its tax service call centers were related to escrow accounts – specifically, about “shortages due to rising property taxes or insurance costs,” said CEO John Walsh.
Toby Wells of Cornerstone Servicing in Houston said his company fields many inquiries from bewildered customers when their payments rise. “They’re shocked,” Wells said. “They ask, ‘What have you guys done?’”
Higher monthly payments have always been challenging for servicers like Cornerstone.
“Nobody is ever happy when their payments go up,” said Wells. But in the last year or so, he said, it’s become a “substantial” problem, “especially for first-time buyers.”
Exactly how much of an increase you’ll see depends on many variables, including where you live. Property taxes are much higher in some states than in others, for example. And some insurers are backing out of locations prone to natural disasters, while those continuing to write policies in those places are hiking their rates appreciably.
According to CoreLogic, between 2019 and 2023, the median property tax for all U.S. residential properties increased by $539 – going from $2,287 to $2,826. That’s a 23.6 percent increase over the four-year period, or 5.9 percent annually.
The reason? According to the National Association of Realtors, from early 2020 to mid-2022, the median sales price for existing homes went up by more than 40 percent.
To some people, a $539 jump over the course of four years might not seem like much. But for many, it’s a budget-buster. Moreover, that’s just the midpoint; some increases are much higher.
Insurance Plays Role
The insurance market is just as wild, if not more so. According to the Insurance Information Institute, insurers’ losses topped $100 billion in 2023 – the fourth consecutive year they’ve been that high – and those charges are passed on to property owners.
Triple-I, as the group likes to be known, said that while rebuilding and replacement costs rose 55 percent between 2019 and 2023, premiums increased just 32 percent during the same period. But again, those are national numbers. Local increases can be staggering. One Florida policyholder hunting for a new insurer said he was quoted an annual premium of $7,200 for a policy that currently cost him just $2,200.
Actually, the Sunshine State stands as a microcosm of what’s going on elsewhere. Triple-I said the average premium in Florida is now $6,000, whereas the national average is $1,700. Last year, premiums for homeowners in the state jumped 42 percent on average, and that’s on top of an average 33 percent boost in 2022.
The good news about all of this, if you could call it that, is that you’re likely to have plenty of notice your costs are rising. Taxing authorities notify their residents several months in advance about increases, and most insurers do the same. And if you have an escrow account, your loan’s servicer will inform you of any changes about 90 days in advance so you can prepare accordingly.
“We try to keep our customers informed,” said Wells. “As soon as we know taxes and/or insurance are going up, which is usually three months before they’re due, we tell them what’s happening.”
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.
