Why Property Taxes Can Change Your Monthly House Payment

You bought your home with a fixed-rate mortgage.

Your interest rate hasn't changed.

Your loan balance is going down.

So why did your monthly mortgage payment suddenly go up?

One of the most common reasons is property taxes.

Many homeowners think that having a fixed-rate mortgage means their entire monthly house payment will remain exactly the same for the life of the loan. But that's not necessarily true.

Your principal and interest payment may be fixed, while other expenses included in your monthly payment can change.

Let's break down why.

Your Mortgage Payment May Include More Than Your Mortgage

When people say, "My house payment is $1,500 a month," that payment may actually contain several different expenses.

You may hear the term PITI, which stands for:

Principal – The portion of your payment that reduces the amount you borrowed.

Interest – What you pay the lender for borrowing the money.

Taxes – Property taxes assessed on the property.

Insurance – Homeowners insurance.

Depending on the loan, your payment could also include mortgage insurance or other required expenses.

So while we commonly call the entire amount a "mortgage payment," only part of it may actually be principal and interest on the mortgage.

A Fixed Interest Rate Doesn't Mean Fixed Property Taxes

This is the important part.

If you have a fixed-rate mortgage, your interest rate doesn't change.

Your scheduled principal and interest payment generally remains consistent.

But your lender doesn't control your property taxes.

Property taxes are determined separately, and the amount owed can change over time.

If your taxes increase and they're being collected through your mortgage payment, your monthly payment may need to increase too.

What Does Escrow Have to Do With It?

Many homeowners pay their property taxes and homeowners insurance through an escrow account maintained by their mortgage servicer.

Instead of receiving a large property tax bill and paying it entirely out of pocket when it's due, the lender collects a portion of the estimated expense with each monthly mortgage payment.

The lender then uses the money accumulated in the escrow account to pay the tax and insurance bills when they're due.

For example, if your annual property taxes were $3,600, approximately $300 per month would need to be collected toward that expense.

If those taxes later increased to $4,200 annually, approximately $350 per month would be needed.

That's a difference of about $50 every month just from the change in property taxes.

Your mortgage rate didn't change.

Your house payment did.

Why Do Property Taxes Change?

There are several reasons your property tax bill may change.

Property taxes generally involve both the property's assessed value and the tax rates or levies that apply to the property.

Changes can occur because of things such as:

• Changes in assessed value

• Changes in local tax rates or levies

• Changes involving exemptions

• New construction or improvements

• Reassessment

• Changes made by local taxing districts

It's also important to understand that your home's market value and its assessed value aren't necessarily the same thing.

Buying a Home Can Sometimes Change the Tax Picture

This is especially important for buyers.

When you're considering purchasing a property, don't assume that the seller's current tax situation will always be identical to yours.

The seller may have exemptions or circumstances that don't apply to the new owner.

There may also be changes in assessed value over time.

That's why buyers need to look beyond the current monthly mortgage estimate and understand the other expenses involved in owning the property.

Escrow Analysis Can Cause Payment Changes

Mortgage servicers periodically review escrow accounts to determine whether enough money is being collected to pay anticipated property taxes and insurance.

This is generally called an escrow analysis.

If the servicer determines that your taxes increased, your monthly escrow contribution may increase.

But sometimes there's another issue.

You Could Have an Escrow Shortage

Suppose your lender estimated that your taxes would be $3,600.

But the actual bill ended up being $4,200.

Your escrow account is now short by $600.

The lender still had to pay the tax bill.

Now two things may happen:

Your monthly payment may need to increase to account for the higher tax bill going forward, and you may also have to make up the previous escrow shortage.

That's why some homeowners receive a notice showing a surprisingly large payment increase.

Part of the increase may be the new estimated expense, while another part is repaying the shortage from the previous year.

Here's a Simple Example

Let's say your monthly payment originally looks like this:

Principal & Interest: $1,000

Property Taxes: $300

Homeowners Insurance: $125

Total Monthly Payment: $1,425

Now your property taxes increase by $600 per year.

That's another $50 per month.

Your new payment could become:

Principal & Interest: $1,000

Property Taxes: $350

Homeowners Insurance: $125

New Monthly Payment: $1,475

Nothing happened to your interest rate.

Nothing happened to the terms of your fixed-rate mortgage.

The cost of owning the property changed.

Insurance Can Do the Same Thing

Property taxes aren't the only reason a house payment can change.

Homeowners insurance premiums can increase too.

If your insurance is escrowed, an increase in your annual premium can increase the monthly amount your lender needs to collect.

If both taxes and insurance increase during the same year, the difference can become noticeable.

This is why homeowners should review escrow statements instead of automatically assuming the lender changed their mortgage.

Your House Payment and Your Mortgage Aren't Exactly the Same Thing

This distinction makes everything easier to understand.

Your mortgage loan has its own terms.

Your total monthly house payment may include expenses outside of the actual loan.

With a fixed-rate mortgage, principal and interest can remain predictable while taxes and insurance continue to change.

That's why your total payment may not remain exactly the same for 15, 20, or 30 years.

Buyers Should Budget for Future Changes

When you're buying a home, don't budget so tightly that even a modest increase in taxes or insurance creates financial stress.

Ask what the current taxes are.

Understand what your homeowners insurance may cost.

Ask whether mortgage insurance will be included.

Find out whether taxes and insurance will be escrowed.

And remember that today's payment is based partly on today's expenses.

Those expenses can change.

Homeowners: Read Your Escrow Analysis

If you receive a notice that your payment is increasing, don't panic.

Read the escrow analysis.

Look for changes in:

• Property taxes

• Homeowners insurance

• Escrow shortages

• Required escrow reserves

The statement should help explain why the payment is changing.

If something doesn't make sense, contact your mortgage servicer and ask them to explain the calculation.

What If You Don't Have an Escrow Account?

Some homeowners pay property taxes and insurance themselves instead of through their mortgage payment.

In that situation, a tax increase won't necessarily change the amount you send to your mortgage company each month.

But your overall cost of homeownership still increased.

Instead of seeing the increase spread across monthly mortgage payments, you'll feel it when the property tax bill comes due.

Either way, the homeowner ultimately pays the expense.

Final Thoughts

One of the biggest misconceptions about fixed-rate mortgages is:

"I have a fixed rate, so my monthly payment can never change."

That's not necessarily true.

Your principal and interest may remain predictable with a fixed-rate mortgage, while property taxes and homeowners insurance can change throughout the years you own the property.

If those expenses are escrowed, increases can show up directly in your monthly house payment.

So when your mortgage statement suddenly shows a different amount, don't automatically assume your interest rate changed.

Look at the taxes. Look at the insurance. Look at the escrow analysis.

Understanding what makes up your entire monthly payment is one of the most important parts of budgeting for homeownership.