Mortgage payments can be complicated, especially if you’ve recently moved into a new home or are a first-time homebuyer. 32% of homebuyers across the state last year were first-time homebuyers. If you count yourself among them, you may be just beginning to feel comfortable paying a mortgage, managing house insurance, and keeping tabs on fluctuating property values and property taxes.
But, whether you’re a first-time homebuyer or a long-time property holder, it can be frustrating—and confusing—to see your mortgage suddenly increase after a year of stable payments. After all, why would your mortgage payment go up after a year of you making steady payments?
While sometimes this can be due to having an adjustable-rate mortgage (ARM), even homeowners with a conventional mortgage will see their monthly payments fluctuate due to property taxes and changes in their escrow account calculations.
In this article, we’ll explore how mortgages can suddenly increase due to property values and taxes, even if you haven’t changed your mortgage. Then we’ll discuss a few strategies you can use to reduce that fluctuation and minimize future mortgage payment increases.
How Does a Mortgage Work? And Why Would a Mortgage Payment Go Up in a Year?
There are two different ways of looking at what a ‘mortgage’ constitutes:
- The repayment of the home loan you took out, in the form of monthly payments comprising a portion of the principal and a portion of the interest. For example, if you took out a $350,000 mortgage at a 6% rate, your strict mortgage payment is $2,098.
- The total monthly payment you make to your mortgage holder, which includes your home mortgage (principal and interest), monthly home insurance premium, and 1/12 of your estimated property taxes. It might also include PMI if you didn’t put 20% down on your home. When you’re taking this view of your mortgage, it might come out to $3,173—$2,098 for the principal and interest, $725 for property taxes, $250 for insurance, and $100 for your PMI. Of course, not all homeowners have an escrow account, and some people pay their property taxes by themselves without using an escrow account.
For the majority of Texan homeowners, that latter number is what most people imagine when they’re thinking about their mortgage, as it’s the amount they pay each month to their mortgage holder.
The Role of Taxes in Your Monthly Mortgage Amount
One of those line items in a total mortgage payment is property taxes.
While conventional mortgage interests hold steady, the other components are more turbulent. House insurance premiums may increase depending on risk factors, claims histories, and the specific company involved (though homeowners may shop around to reduce their premiums).
Related: Ways to Cut the Tax Value of Your Property
Property taxes are particularly worthy of attention because they can change in multiple ways: increased property valuations, increased or decreased property tax rates, and increased or decreased estimates for property taxes through an escrow account provider.
Escrow Account: The Basics of How Mortgage Payments Can Change After a Year
Most homeowners who have a mortgage have what is called an escrow account. When your mortgage provider charges your mortgage, they ensure all the different parts reach the right audiences. The funds for your premiums will be transferred to your insurance provider (at monthly, semi-annual, or annual intervals, based on the specifics of your plan). Similarly, the mortgage provider holds estimated property taxes in the account until payment is due to the local tax office by January 31.
It’s worth taking a closer look at that process. Local tax offices officially release property tax bills around October of a given year, with the payment deadline being approximately four months later, at the end of January. But homeowners pay their property taxes every month—so where does that monthly charge come from?
Based on historical data, escrow account services calculate each homeowner’s estimated property taxes. They consider property taxes from previous years, how close the estimates were to the final bill, and whether those estimates were too high or too low.
If your property taxes unexpectedly surge to new highs, then your mortgage will also increase—both to make up the difference and to more accurately match forecasts for the upcoming year. But suppose your property taxes are lower than anticipated. In that case, your mortgage provider might return the extra funds or give you the option of leaving them in the account and significantly reducing mortgage payments for the following annual period.
Conversely, if your tax escrow account is short on funds for your property tax bill, your mortgage can go up the next year. Your mortgage company will cover the difference between the amount due and the collected funds, and then they collect that amount for you across the subsequent months. Additionally, your mortgage lender will factor the increase into their calculations and collect a larger amount for the following year’s property taxes to minimize the risk of another shortfall.
Quick Summary: Reasons Why Your Mortgage Payment Can Go Up After a Year
If you have a mortgage and pay into an escrow account, a handful of line items make up the monthly bill. Any line item, including the principal and interest category, can change if you have an adjustable mortgage rate, thereby increasing or decreasing your payment. Some of these factors, like an adjustable interest rate and PMI, you have limited control over. You can control others, like your insurance premiums, by choosing different providers.
With your property taxes, you have some control, but it’s limited. Your local tax appraisal district determines your property’s appraised value, and your local tax officials use that value to calculate your tax bill. However, you can take a few steps to influence (or at least stabilize) those numbers.
How Property Tax Assessments Can Change Your Future Mortgage Payments
Texas does not have a state income tax, so the funds for local services and projects—ranging from new school stadiums and town roadways to emergency services personnel salaries—come from locally collected property taxes. Because it’s such an essential source of funding for the state, property taxes in Texas are much larger than in other states, coming in at an average of 1.74% (the sixth highest in the country).
This means your property taxes will make up a significant portion of your homeownership costs yearly. For example, if you recently purchased a house valued at $350,000 on the tax records, you will pay $6,090 a year, or approximately $507.5 a month, on property taxes. Two key variables to consider are your home’s appraised value ($350,000) and your local tax rate (which may be the average of 1.74% or even higher). Both of those numbers are going to change over time, especially the appraisal value.
Why Property Tax Assessments Go Up
Property tax assessments tend to trend upward, especially over the past several years. Counties across the state have seen property values spike up 50% or even double because of demand increases. While these upward increases are stabilizing, you’re most likely to continue seeing increases in your property value.
Related: Understanding the 10% Homestead Exemption Cap
New property owners, especially, are more likely to see increases. Here are some common reasons why your property tax assessment has likely increased significantly more than you expected over the past year:
- Property values in many popular metropolitan areas and suburbs will continue to outstrip 10% yearly increases.
- New homeowners are unfamiliar with property value trends in their neighborhoods, making it harder to protest property tax increases effectively and argue down increased appraisal values.
- New homeowners will have a brief gap between when the former homeowner had a homestead exemption and when they filed for a homestead exemption. During this gap, the property isn’t protected by the 10% homestead exemption cap, so the property’s recorded value may go up 15%, 20% or even higher based on local market factors.
Any of these factors, as well as continued appreciation and growing demand in your new neighborhood, can increase the property’s value in the county records. This, in turn, will increase your property tax bill from what you may have paid during your first year of ownership or even what you remember repaying a portion to the seller during the purchase transaction.
How You Can Reduce Future Increases to Your Property Taxes and Stop Your Mortgage Payment From Going Up After a Year
The good news is that there are some steps you can take to protect your interests and limit future spikes in your property’s value. Consider these best practices:
- If you qualify, file for a homestead exemption. This measure protects your appraisal value by guaranteeing your property can’t increase by more than 10% based on market forces. This will stabilize any increases over time so you aren’t left facing shockingly high property tax bills. It will also exempt $40,000 of your home’s value from school district tax calculations.
- Protest your property taxes or hire tax professionals to do so. Every homeowner in Texas has the right to protest against the local tax appraisal district’s property valuation. If the number is too high, you can file a protest form, submit documentation supporting a lower valuation, and navigate a series of meetings or hearings to argue your case. Many homeowners find this process complex and hard to manage, so they forfeit their rights and accept the valuation. However, every homeowner can also appoint a third-party agent or service to handle it.
Stay On Top of Property Tax Changes With Help From Home Tax Shield
At Home Tax Shield, we help both new homeowners and long-term property owners fight for fair property taxes. Our team can assess your property and manage the protest process from start to finish. This can ensure you aren’t overpaying on your monthly mortgage payments due to an inflated property valuation. Sign up today to get started for 2023 property taxes.