When you first purchase a home, you’re probably focused on your monthly mortgage payment and making sure it fits within your budget. But as time goes on, that payment may change—so it’s important to understand what factors are at play. Let’s break down the components of your mortgage payment and discuss why your monthly amount may fluctuate over time.
Breaking Down Your Mortgage Payment: PITI
To fully understand your mortgage payment, let’s first define some key terms:
- Principal – The amount you originally borrowed to purchase your home.
- Interest – The cost of borrowing the money. If you have an adjustable-rate mortgage (ARM), this amount can change over time as interest rates fluctuate.
- Taxes – These are your property taxes, typically calculated annually, divided into monthly payments, and placed into an escrow account. Your lender uses this account to pay your taxes when they are due.
- Insurance – This is your homeowner’s insurance, which is also divided into monthly installments and placed into escrow. Your lender pays the insurance premium at your policy’s annual renewal.
Together, these components make up what’s called your PITI payment: Principal, Interest, Taxes, and Insurance. Many mortgage calculators show you only the principal and interest, but the full PITI payment will be larger, and some homeowners are surprised by the actual amount when taxes and insurance are factored in.
Private Mortgage Insurance (PMI)
If you put down less than 20% when purchasing your home, you may also be required to pay for Private Mortgage Insurance (PMI). This is an additional cost that protects the lender if you default on your loan. Once your loan-to-value ratio falls below 80%, you may be able to remove PMI, but until then, it will be part of your monthly payment.
So, Can Your Mortgage Payment Change?
The short answer is yes—your mortgage payment can change, and here’s why:
While the principal and interest portion of your payment (especially with a fixed-rate mortgage) tends to stay stable, taxes and insurance are subject to change. Your property taxes may increase as the value of your home rises or if local tax rates go up. Similarly, your homeowner’s insurance premiums can increase over time, depending on factors like inflation or changes to your policy.
Both taxes and insurance are held in an escrow account, which your lender reviews annually. If your escrow account runs short—meaning there wasn’t enough set aside to cover your taxes or insurance—your mortgage payment will increase to make up for that shortfall.
A Real-Life Example: Escrow Adjustments in Action
Let’s take a look at a real-world scenario. A couple purchased their home several years ago, with an initial mortgage payment of $800 per month. Over the years, their taxes and insurance gradually increased, bringing their monthly payment up to $1,080. However, during their most recent escrow review, the lender found that their account had a shortfall—there wasn’t enough in escrow to cover their property taxes and insurance premiums for the year. As a result, their new payment jumped to over $1,300 per month.
While this increase is still below the market rental rate for a similar home, it represents a 25% increase to their budget. Unlike renters, who can negotiate their rent or decide not to renew a lease, homeowners are locked into these higher payments until they sell or refinance.
Why Homeownership Still Offers Stability
Even though your mortgage payment can increase, it tends to be more stable over the long term compared to renting. Rent payments are typically subject to annual increases, often tied to inflation and rising market rates. As a homeowner, while your taxes and insurance might rise, your principal and interest payments stay consistent, especially with a fixed-rate mortgage. This means that, over time, owning a home may offer more predictability than renting.
The Bottom Line: Housing Costs Are Rising for Everyone
Whether you own a home or rent, it’s clear that housing costs are on the rise. Homeowners may experience fluctuations in their mortgage payments due to escrow adjustments, while renters face annual rent increases. The key takeaway is that both options come with their own set of challenges, and understanding how your mortgage payment works can help you be better prepared for any changes.
If you have questions about your mortgage or are considering buying a home, let’s chat! I’m here to guide you through the process and help you navigate the complexities of homeownership.