Property Taxes & Homeowners Insurance: How They Factor Into Your Mortgage

Why Property Taxes and Homeowners Insurance Are Part of Your Mortgage Payment

When you take out a mortgage, your monthly payment can include more than just the loan’s principal and interest. For many borrowers, it also includes an amount for property taxes and homeowners insurance, which is held in an escrow account. This combined payment is often called PITI: principal, interest, taxes, and insurance.

The total monthly payment you send to your mortgage company typically includes homeowners insurance and taxes that may be held in an escrow account. Many lenders require an escrow account, but not all do. If your loan does not have an escrow account, you pay property taxes directly to your state or local government and homeowners insurance directly to your insurance company.

• PITI = Principal + Interest + Taxes + Insurance
• Escrow accounts are used to collect funds for taxes and insurance
• Not all mortgages require escrow; it depends on your lender and loan terms

Sources: Consumer Financial Protection Bureau

How Property Taxes Are Calculated

Property taxes are calculated using your property’s assessed value and the local tax rate. The assessed value is set by your local government, and the tax rate is determined by local taxing authorities such as counties, cities, and school districts.

Your property tax bill can change from year to year. For example, if your home increases in value, your property taxes typically increase as well. Many jurisdictions offer exemptions that can lower your taxable value, so it’s worth checking with your local assessor’s office.

• Property tax = Assessed Value × Tax Rate (or Mill Rate)
• Assessed values are set by local governments
• Tax rates vary by locality and can change due to reassessments or voter-approved changes

Sources: Stewart Title, Consumer Financial Protection Bureau

Average Property Tax Rates by State

Property tax rates vary widely across the United States. While it is difficult to provide a single national average due to local variations, you can look up the effective property tax rate for your specific state and county. State tax authorities, county assessors, and real estate websites often publish these figures.

When estimating your property taxes, remember that the rate is applied to your assessed value, which may not equal the market value. You can often find your local tax rate online or by contacting your county assessor’s office.

• Property tax rates vary by state and locality
• Effective tax rate = Annual Property Tax ÷ Home Value
• Check your local assessor’s office for specific rates

How Homeowners Insurance Is Calculated

Homeowners insurance premiums are set by insurance companies based on the risk of insuring your home. The specific factors vary by insurer, so the best way to estimate your premium is to get quotes from multiple providers. Your lender will require you to maintain homeowners insurance, but you can choose the policy that fits your needs.

• Insurance premiums depend on the home’s characteristics and location
• Get quotes from multiple insurance providers to estimate costs
• Your lender requires coverage, but you can choose the policy

Average Home Insurance Costs by State

Homeowners insurance premiums also vary significantly by state. Factors such as weather risk, construction costs, and local regulations all contribute to these differences. To get an accurate estimate for your area, obtain quotes from insurance companies or consult your state’s department of insurance.

When comparing costs, keep in mind that the amount of coverage, your deductible, and your claims history will affect the premium. Your insurance agent can help you find a policy that balances cost and protection.

• Premiums vary by state due to risk and cost factors
• State insurance departments often provide consumer information
• Quotes from multiple insurers give the best estimate

How Escrow Works: Collection, Payment, and Adjustments

An escrow account is managed by your mortgage servicer to set aside money for property taxes and homeowners insurance. Rather than paying a large tax bill once or twice a year, you contribute monthly as part of your mortgage payment. Your servicer holds the funds and pays the bills when they are due.

At the start of your loan, your lender looks at your expected property tax and homeowners insurance bills for the year, adds them up, and divides the total by 12 to determine your monthly escrow payment. Federal guidelines allow a cushion, typically up to two months of escrowed items, to reduce the risk of a shortfall if bills arrive earlier than expected or assessments rise midyear.

Each year, your servicer completes an escrow analysis to compare how much was collected, how much was paid, and whether enough funds remain in the account. If property taxes or insurance premiums increase, your servicer may need to collect more money monthly, which can lead to higher monthly mortgage payments, an escrow shortage, or a one-time payment option to cover the shortage. If there is a surplus above the allowed cushion, the servicer is required to refund the difference, usually by check or by applying it to future payments.

• Monthly escrow payment = (Expected yearly taxes + Expected yearly insurance) ÷ 12
• Servicers typically perform an annual escrow analysis
• Escrow payments can change if tax or insurance costs change
• You have the option to pay a shortage as a lump sum or spread over 12 months

Sources: Stewart Title, Consumer Financial Protection Bureau, American Financing, First Alliance Credit Union

How to Estimate Taxes and Insurance for a Property

Before buying a home, you can estimate your property taxes and homeowners insurance to understand your total monthly payment. For property taxes, look up the current assessed value and the local tax rate, or contact your local tax assessor’s office. For insurance, get quotes from insurance providers for the specific property.

Your Loan Estimate form, which you receive after applying for a mortgage, will show the estimated taxes and insurance included in your total monthly payment. It will also indicate if escrow is required or if you are expected to pay these costs separately. Many online mortgage calculators show only principal and interest, so you need to add these costs yourself to get a realistic figure.

• Use local tax records and insurance quotes for estimates
• Check the Loan Estimate for escrow details
• Remember to include taxes and insurance in your budget

Sources: Consumer Financial Protection Bureau

Ways to Save on Taxes and Insurance

While you generally cannot control the tax rate, you can review your property’s assessed value for accuracy and appeal if you believe it is too high. Many homeowners successfully appeal their assessment to lower their tax bill. Also, look for available exemptions, such as homestead exemptions, that can reduce your taxable value.

For homeowners insurance, shop around with multiple providers to find competitive rates. You may qualify for discounts for things like bundling policies, installing security systems, or having a good claims history. It’s also wise to review your coverage annually to ensure you’re not over-insured.

• Appeal your property tax assessment if you think it’s too high
• Explore local exemptions
• Compare insurance quotes and ask about discounts