How Property Taxes And Insurance Can Affect Your Monthly Mortgage Payment

As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about approval process here.

There are many reasons why your monthly payment can change. Your monthly payment includes your mortgage payment, consisting of principal and interest, as well as property taxes and homeowners insurance. Your mortgage payment is likely to stay the same, but your monthly payments can vary. Here, we look at what influences taxes and insurance and explain how these factors can change your monthly payment.

When you apply for a mortgage preapproval, you and your lender will estimate your monthly payment, including the principal and interest and also the estimated monthly escrow payment (which goes towards property taxes and homeowners insurance) based on a typical home in the area where you’re looking to buy.

You should also keep in mind that this estimate is just that- An estimate. It could be based partially on how much the previous owner paid in taxes and insurance or on what taxes in the area typically run. The true tax total won’t be determined until you decide on the house you want, and insurance won’t be calculated until you’ve chosen a company and the policy that’s right for you.

And as frustrating as it is, even after you’ve chosen a house, your monthly payment is subject to change before closing. Here’s why:

Property Taxes

Property taxes are based on the assessed value of the home. Several factors influence this, including, notably, the value of comparable properties in the area and condition of the home. The higher the home’s assessed value, the higher taxes will be. This means taxes will increase with renovations made. And when the economy is doing well, home values increase, and your property taxes will increase, too. When the economy isn’t as strong, property taxes can decrease as property values go down.

The physical location of the home also influences the tax rate. Because taxes help fund school districts, infrastructure and public services, property taxes are partially based on how much revenue is required to pay for these services in a given area. When cities and counties require additional funds, your taxes may increase.

Even if you know the exact amount that the seller of a particular home pays in taxes, you might not be paying the same amount. Taxes can vary depending on how you plan to use the property. The homestead exemption allows a portion of your taxes to be discounted, but this property tax exemption is reserved for primary residences only. If you’re purchasing a second property to use as a vacation home or rental, you won’t be eligible for this discount, which changes your taxes and your overall monthly payment.

Homeowners Insurance

Lenders also estimate the cost of homeowners insurance based on zip code and comparable homes in the area. But the original estimate can be inaccurate, as insurance rates depend heavily on the provider and the deductible that clients choose. Your insurance payment will change once you decide on a specific policy. You decide how much coverage you want, the deductible you want to pay and whether you want to combine homeowners insurance with other types of insurance (such as car insurance). Because you can shop around for different insurance policies and receive discounts for bundling several policies together, your payment might differ from the one your lender estimated for you.

Figuring out how all these factors influence your monthly payment can be confusing and sometimes frustrating, but understanding why your payment changes can make the process go much smoother.

The Bottom Line

It’s important to go into the home buying process with your eyes open to the various factors that can affect your mortgage payment. You’ll want to understand what you can really afford and make sure that additional charges aren’t taking you above that number. To help you make sense of the costs you can expect, consider getting preapproved. Then, you’ll be ready to begin house hunting with confidence!