Why Mortgage Payments Go Up
One of my clients called me this yesterday, in a panic. His mortgage payment had gone from $883 per month to $1155 per month. He is on a fixed income, and he cannot afford the new payment. He is now $5000 behind in payments. He wanted to know why mortgage payments go up and could I sell his house for him.
Of course I can sell his house for him, but what’s really going on here?
A few things went through my mind. I knew he was a veteran, so his interest rate was fixed. The rise had to come from his taxes and insurance. In South Carolina, this is a common problem.
South Carolina taxes all real property at what they call a 6% assessment rate, unless the owner can show that the property is his primary residence. Owner-occupants pay a 4% assessment rate, which works out to be 2/3rds of the 6% rate, plus a credit for the school tax. With the school tax credit, the 4% rate ends up being about 1/3rd of the 6% rate.
When you purchase a home and move into it, you must file the 4% application in order to receive the discounted tax rate and reduced tax bill.
Failure to file this application will cause big problems with your mortgage company, because they pay whatever tax bill they receive for your property – no questions asked.
South Carolina tax bills come out in October, and mortgage companies pay them within a month or so. Around April, mortgage companies review their escrow accounts and update your mortgage payment accordingly.
If your escrow account meets the minimum balance requirement, your mortgage payment stays the same until the following year. If your escrow balance is below the minimum balance requirement, your payment will rise to make up the shortfall, or you will be given the opportunity to send a check that covers the shortage. If the escrow balance is at or above the minimum balance requirement, you may receive a check from your mortgage company or notice of a lower monthly mortgage payment.
In my client’s case, his mortgage company estimated his annual taxes at about $900. When the bill came, it was $2400. The mortgage company paid the bill, and in April discovered a $1500 shortage.
Since last year’s tax bill was $2400, the mortgage company expects this year’s tax bill to be at least that much.
So now they need to collect the $1500 shortage, which brings the escrow account to zero, plus collect 3-4 months of estimated taxes for this year ($200/month=$600-800), plus raise the mortgage payment to ensure there’s enough money there to pay this year’s bill when it comes.
As you can see, this snowballs very quickly into a HUGE problem.
So what can he do to fix it? Well, the good news is he doesn’t have to sell his house.
I brought him the paperwork he needs to file with the county to get his reduced tax bill and refund for overpaying last year. This refund will be sent directly to his mortgage company. I also called his mortgage company to explain what was going on with the taxes so they could note his file.
Once his mortgage company receives the refund, his payment will go back to what it was and he can go back to sleeping at night.
When you have problems like this, always call your REALTOR®. Chances are, we can help you. That’s what we’re here for.