A borrower has a 30-year fixed-rate mortgage with monthly principal and interest of $1,450. Property taxes increase, and taxes are paid through escrow. What can happen to the total monthly payment?
Correct Answer
A) It can increase because the escrow portion may change even though principal and interest remain fixed
Why this is correct: On a fixed-rate mortgage, the principal and interest (P&I) portion of the payment is locked for the loan term. However, the total monthly payment often includes escrow for property taxes and insurance. If property taxes increase, the lender adjusts the escrow portion upward to ensure sufficient funds are collected to pay the tax bill when due. This increases the total payment, even though the P&I amount remains unchanged. Why the other choices are wrong: "It must remain $1,450 for the full term" is wrong because $1,450 is only the P&I; the total payment includes escrow, which can change. "The note rate automatically increases" is wrong; the note rate on a fixed-rate mortgage is contractually set and does not change due to tax increases. "The principal balance returns to its original amount" is wrong; the principal balance amortizes downward over time and is unaffected by escrow changes. Exam tip: Remember the core components of a total monthly payment: Principal + Interest + Escrow (for taxes/insurance). Only the P&I is fixed on a fixed-rate loan; escrow is variable.
Why This Is the Correct Answer
Why this is correct: On a fixed-rate mortgage, the principal and interest (P&I) portion of the payment is locked for the loan term. However, the total monthly payment often includes escrow for property taxes and insurance. If property taxes increase, the lender adjusts the escrow portion upward to ensure sufficient funds are collected to pay the tax bill when due. This increases the total payment, even though the P&I amount remains unchanged. Why the other choices are wrong: "It must remain $1,450 for the full term" is wrong because $1,450 is only the P&I; the total payment includes escrow, which can change. "The note rate automatically increases" is wrong; the note rate on a fixed-rate mortgage is contractually set and does not change due to tax increases. "The principal balance returns to its original amount" is wrong; the principal balance amortizes downward over time and is unaffected by escrow changes. Exam tip: Remember the core components of a total monthly payment: Principal + Interest + Escrow (for taxes/insurance). Only the P&I is fixed on a fixed-rate loan; escrow is variable.
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