Some homeowners are hit with unexpected mortgage payment increases

METRO DETROIT — For those in the market to purchase a home, one of the most important parts of the process is determining what they can afford to pay as a monthly mortgage payment.

After crunching the numbers, real estate professionals and mortgage loan officers can help potential buyers figure out what price range they should stay in when making a purchase offer so they avoid a monthly mortgage payment that doesn’t fit their budget.

However, despite doing what they thought was their due diligence, many homeowners get an unpleasant surprise after purchasing a home when they learn, months later, that their mortgage payment has been increased.

What many homeowners don’t realize is that the taxable value the previous homeowner was paying was based on the year they purchased the home. However, at some point after a home is sold, municipalities conduct a property reassessment to determine the current taxable value, and that can lead to a significant increase in monthly mortgage payments.

In 1994, Michigan voters approved Proposal “A,” a constitutional amendment that established taxable value as the basis for the calculation of property taxes.

Increases in taxable value are limited to the percent of change in the rate of inflation or 5%, whichever is less, as long as there were no losses or additions to the property.

The limit on taxable value does not apply to a property in the year following a transfer of ownership. At that time, the taxable value increases to the assessed value.

Jake Slobin is a senior loan officer with Supreme Lending in Farmington Hills. He explained why new homeowners can expect to see a jump in their monthly mortgage payments after purchasing a property.

“People who bought houses 10, 15 years ago … pretty much get grandfathered into that taxable rate,” Slobin said. “Now, you fast forward 10, 15 years that person’s owned the home, and now they’re selling. Well, the new person coming in is gonna have to pay taxes on what the new sales price is. … Say someone bought a house in 2021 and someone comes in there and buys it now, in 2023. Those aren’t the people that are gonna see a big tax jump; the big tax jump comes when someone bought a house five, 10, 15, 20 years ago, and now someone new is coming in and buying it.”

A significant period of time can pass before new homeowners learn that their monthly mortgage payments have jumped.

“Each year, your mortgage servicer does what’s called an escrow analysis, and when they do the escrow analysis, they go back and say, ‘OK, well, you’ve only been paying $2,000 for the year for your taxes — well, in actuality, your taxes have jumped to four grand.’ So, not only are they going to, obviously, make that increase and make you start paying going forward (to) what the taxes are now, there’s also been a shortage for the past year — you’ve only been paying $200 a month in taxes, when really you should’ve been paying $350 a month,” Slobin said. “So they get hit with that combo of, ‘OK, not only do we have to pay back the shortage, we’re also now paying what the taxes have jumped to.’ So that’s something that I’d say, over the past two years, I get calls about constantly, and what I like to do is remind the buyer that, ‘Hey, mortgage companies have zero control of what the city is gonna do with your taxes; when (the previous owner bought) a house for a hundred grand and the taxable value was significantly lower, well, now you’re buying it for 250 (thousand dollars), five, 10 years later — that’s exactly what’s gonna happen; your taxes are gonna make a significant increase.’”

Larry Campbell is the owner of Century 21 Campbell Realty in Madison Heights and has been in the real estate business for approximately 50 years.

“The assessors, based on laws, are looking at tax sales 12 months backwards,” he said. “That’s gonna be sort of the guidepost or the benchmark, where all these properties are going to increase as a direct result of past sales.”

The homeowners who are most likely to be affected by increased monthly mortgage payments are homeowners who bought a property that the previous owner inhabited for a long time.

“If the people have been there for a long time, it is not unusual to consider the property taxes almost double. By doubling, I tell you, it’s within one year. That’s profound, isn’t it?” Campbell said.

Thomas Naughton is an executive loan officer with Atlantis Mortgage in Farmington Hills. Given that there is often no warning to homeowners, he said that, in most cases, an increase in mortgage payments comes as a shock.

“Most of the time, they’ll call their mortgage broker, the lender directly and say, ‘Hey, what is this? My taxable value’s going up; why is it so high? What happened?’ … There’s no real way to get out of it at that point, in a sense,” Naughton said. “Once the tax bill hits, that’s money owed, and (it’s) in your name. … In certain situations, I’m sure people have had to sell the home because they weren’t anticipating the taxes rising so much and the lender … neglected to tell them that, or it was just something that was out of sight for both the lender and the people purchasing the property, so it was never thought of at the time.”

When Livonia resident Ami Sardesai purchased his first home in 2005, he figured that his mortgage payment was locked in for 30 years and was surprised to learn later that it had increased by approximately $30 or $40 per month.

In that case, the previous homeowner had lived there for around two years.

In 2019, Sardesai purchased another home, and although — based on his first experience — he was expecting an increase in his mortgage payment, he wasn’t quite prepared for it to go up as much as it did, which was approximately $300 per month. The previous homeowners lived in the home that he and his wife now occupy for more than 30 years.

“No one alerted me, ‘Hey, remember this will happen,’ or anything like that,” Sardesai said. “When we came in the first year, we were paying, basically, the taxes that they would’ve paid, but then, in the second year in the house, now they transferred the ownership — we’re brand new owners — so now we have to pay the actual value.”

Slobin, Campbell and Naughton all agree that potential homebuyers should be informed in advance about taxable values before agreeing to purchase a property.

“We do preemptively warn our clients, and we think most mortgage people should be doing this,” Naughton said. “We try to tee it up and let them know, ‘Hey, you’re buying a house that hasn’t been sold in 15 years, so they’re going to reassess the value on your home when the appraisal is done, and whatever you’re funding into your escrow account or whatever the previous taxes were, it’s going to look much different.’”

Jeremy Stybel is the vice president of Atlantis Mortgage. He shared one possible reason why some lenders don’t inform potential buyers that their mortgage payments are likely to increase.

“They don’t (want to) get yelled at by a real estate agent or whatever else for possibly losing a sale because they told the truth,” Stybel said. “Ninety percent of the time, nobody tells them that, and it is a very big problem. I think a lot of them are scared that they’re gonna lose buyers because of that reason.”

Campbell said that homeowners are in disbelief when they realize that their taxes have gone up “way, way, way” more than they expected.

“A good buyer agent will tell you, ‘These are some of the things that we could expect as we move forward.’ … My recommendation, if you’re going to buy a house, buy from a Realtor that’s full-time, that makes a living helping people, not that’s doing it as a part-time gig, working two to three jobs,” Campbell said.

Slobin discussed when new homeowners can expect to see an increase in their mortgage payments.

“The tax jump happens typically within a year, and then after that initial jump takes place, you’re pretty much steady the rest of the way in your home, unless the city is doing some major project where everyone votes and passes a proposal for that project that the taxpayers are now responsible for,” he said. “After that initial jump, you don’t really see (many) more significant jumps going forward.”

Slobin shed further light on the role assessors play for municipalities.

“Each city assessor’s office, they go out and do tax assessments on the home each year, typically. And what they do is go out, determine the taxable value of the home and, once that determination is made, that’s how they generate the summer and winter tax bills,” he said. “There are people who pay their taxes and insurance separate of their mortgage payment and just make a one-time payment to the city, but most people have escrow accounts in which their taxes and insurance are paid out of, that is part of their monthly payment. … The payment shock that’s happening is for those customers.”

Although nobody is going to get excited about a mortgage payment increase, from Slobin’s perspective, it’s not all bad.

“There’s also the positive,” he said. “The city’s coming out and assessing the value of your property and determining that the value of the property is significantly more than, a lot (of) times, even when you bought it.”