How Property Taxes and Insurance Affect Your Payment

On a $450,000 home, the principal-and-interest portion of a 30-year payment at 6.5% is about $2,276. Add typical property taxes and insurance, and the actual payment might be $2,700–$3,000 — a difference of $400–$700 per month that has nothing to do with your interest rate or loan amount.

Because taxes and insurance vary so much by location and property, they can't be estimated generically. A $450,000 home in Texas (1.8% property tax rate) has very different costs than the same-priced home in Hawaii (0.3%). Getting these numbers right before you budget is important.

Property taxes are assessed annually by your county (and often your city and school district) based on your home's assessed value and the local tax rate — called the mill rate or effective tax rate.

Effective rates vary from under 0.3% (Hawaii, Alabama) to over 2% (New Jersey, Illinois). On a $450,000 home:

To find the actual rate for a home you're considering: search for "[county name] property tax rate" or visit the county assessor's website. Many allow you to look up the taxes paid on a specific parcel.

One more thing to know: property taxes can be reassessed after you buy, especially if the sale price is significantly higher than the prior owner paid. In some states, purchase triggers a reassessment to the new sale price. Budget for this possibility.

Homeowner's insurance covers damage to your home and personal liability. It's required by your lender. Premiums vary based on:

• Location. Coastal areas, wildfire zones, tornado alley, and flood plains all carry higher risk and higher premiums.
• Home age and construction. Older homes or certain materials (like aluminum wiring, knob-and-tube) may be harder or more expensive to insure.
• Coverage amount. You should insure for the replacement cost of the structure — what it would cost to rebuild — not the market value.
• Deductible. Higher deductible = lower premium.

For most homes in lower-risk areas, $1,000–$2,000 per year ($83–$167/mo) is a reasonable baseline estimate. In high-risk areas, $3,000–$6,000 or more is common. Get an actual quote from an insurer for any home you're seriously considering.

Standard homeowner's insurance does not cover:

• Floods. This surprises people. Even an inch of floodwater can cause tens of thousands in damage. Flood insurance is a separate policy through FEMA's National Flood Insurance Program or private insurers. If you're in a flood zone, your lender will require it.
• Earthquakes. Separate policy, significant cost in California and other seismic areas.
• Sewer/drain backup. Often available as a rider.

Check the FEMA flood map for any home you're considering, and ask the listing agent about flood zone status. Flood insurance can add $500–$3,000+ per year to your housing costs.

Most lenders collect taxes and insurance through an escrow account. Your monthly payment includes 1/12 of the annual estimate for each. The lender holds the funds and pays the bills when due.

Once a year, your servicer reviews the escrow account and adjusts your monthly payment if taxes or insurance have changed. If your property taxes went up $600 for the year, your monthly payment increases $50. This happens even on fixed-rate loans — your principal and interest stay fixed, but the escrow portion can change.

The adjustment can go the other way too. If the escrow collected more than needed, you'll receive a refund check and your future payments will decrease. But increases are more common than decreases over time.