My mortgage payment jumped 10%

In the world of Personal Finance media, there is a never-ending battle between renting and owning the home that you live in. This article is not going to get into that. I followed the traditional advice and followed “The American Dream” to buy my own home just 11 months after college graduation. That’s almost been 15 years ago now, and I can look back with clear eyes and see that I would have been so much better off had I rented, maintained location flexibility, and didn’t have a bunch of upcoming expensive capital expenses on the horizon.

But that is not the reason I’m up this morning and typing into my laptop. One of the arguments commonly given as a Con to renting is that your landlord can raise your rent every year, so it’s better to own and get a fixed-rate mortgage so your payment won’t fluctuate at the whim of your bank (AKA your landlord since they own the house until you pay off the mortgage in full).

I started off with an Adjustable Rate Mortgage; it was a special loan product at my credit union for first-time home buyers. This was in 2006, and I had to put 3% down, with a 4.75% interest rate for the first 3 years. After that, it would adjust annually based on some prevailing interest rates and a bit of cushion for the credit union. After the 3^rd year, we were into the Great Recession, so the rate had dropped to the contractual interest rate “floor” of 4%. I had the benefit of that 4% rate for 9+ years, since prevailing interest rates have been so low for a long time. But I always had a fear that rates would eventually rise, and when they started to do so in 2019, I looked into refinancing my mortgage so I could lock in a fixed rate for the new loan. I was able to refinance into a 15-year fixed rate mortgage at 3.125%, my payment went up a few bucks a month, but I shaved off 2+ years from the remaining 17-ish years on my original 30-year ARM. I was ecstatic to save money on interest and save time at the back end of the loan.

Stepping back, a monthly mortgage payment often covers not just the Principal and Interest on the loan with the lender, but also Property Taxes and Insurance that gets collected into an escrow account to be paid when those bills come due each year. Here in Florida, I am protected from skyrocketing property taxes by both my Homestead exemption, but also a program called “Save Our Homes” which limits the amount of annual increase in assessed valuation to just 3% or the rate of inflation, whichever of the two is lower. Therefore, my annual taxes have increased very slowly the past 10 years from a low of $129.15 in 2010 to the $221.93 I paid in November 2020. Yes, those are annual tax bills – this provision kicked in for me at the bottom of the Great Recession and the timing could not have been better.

But taxes are just one part of the monthly mortgage payment that can fluctuate. The property insurance portion can vary wildly, and I have not one, but two different insurance policies on my home. Depending on your location, you could have 2 or more, as well. (I’m thinking earthquake coverage is another standalone policy).

A standard homeowners insurance policy does not include flood insurance, which is something I am intimately familiar with as a Certified Floodplain Manager in my day job. Insurance policies often have an automatic escalation clause written into them, so you get higher amounts of coverage each year because home prices generally rise over time. Not only that, but the cost of repairs and/or reconstruction become more expensive over time as materials and construction labor prices increase, so it isn’t all bad that these policies auto-escalate.

But because I recently refinanced, I had an appraisal that showed my building value was WAY less than the amount of coverage they were trying to sell me. Sure, I could pay for that much coverage, but there was NO WAY they would ever pay out that much insurance when the value was 40% less than that coverage cap. So I had my insurance broker work up a replacement cost estimate, and the value dropped by around $20,000. Still quite a bit above my appraisal (which I always suspected was low to begin with), but at least I could drop the coverage amount and save on some of my premium.

A month or so after that, my flood insurance renewal paperwork came in. Fortunately, with flood insurance, you as the consumer get to choose the amount of coverage for building (up to $250,000) and the amount of contents coverage (up to $100,000). I kept my coverage amounts in place from last year, but the National Flood Insurance Program also increases flood insurance premium rates each year to both keep things in line with rising construction costs. They also increase to make up for the subsidized rates that have been in place for older home such as mine that were built before the first Flood Insurance Rate Map was established in the community. For example, my home was built in 1981, but my county did not join the NFIP until 1984, therefore my home wasn’t built to a required flood elevation standard that had not been established yet. Because of this, my home has qualified for subsidized flood insurance for being Pre-FIRM (pre Flood Insurance Rate Map) and as long as I keep the coverage in place, I get to keep the subsidized rate.

But the cumulative increase from the minor increase in property taxes, the big jump in homeowners insurance and a smaller increase in flood insurance premium has caused my escrow account to run a shortfall. Basically my 2020 mortgage payments collected a smaller amount into escrow than they had to pay out in payments, so they are increasing my mortgage payments in 2021 to catch up. But they are jumping a fairly large amount (9.7%) to both make up for last year’s shortfall and also to cover the higher expected payments for taxes and insurance in 2021.

9.7% is a pretty big jump for a mortgage payment that is assumed to be fixed. I am in a fortunate position to be able to weather that kind of a jump without running into any kind of financial hardship. I doubt my rent would have jumped almost 10% in a year like 2020 where most landlords are just happy to keep paying tenants.

Have any other homeowners experienced big jumps in their monthly mortgage payments? Should I pay this place off so I’m not required to carry so much insurance? Should I sell and enjoy being a renter for a few years?