How Property Taxes Impact Mortgage Payments: A Guide for Homebuyers
When purchasing a home, there’s often a lot of focus on the mortgage rate, down payment, and monthly payment. But one crucial element that can significantly impact your monthly housing costs is property taxes. In this blog, we’ll dive into how property taxes affect your mortgage payments, and why it’s important to consider them when budgeting for your new home.
What Are Property Taxes?
Property taxes are local taxes assessed by your county or municipality on your property. These taxes are typically used to fund public services, including schools, roads, and emergency services. The amount of property tax you pay is based on the assessed value of your property and the tax rate set by your local government.
Property taxes can vary depending on the size and location of your home. This makes it essential to understand how they will affect your overall homeownership costs.
How Property Taxes Are Incorporated into Mortgage Payments
When you take out a mortgage, your lender may require that property taxes be included in your monthly payment. This is usually done through an escrow account, where a portion of your monthly mortgage payment is set aside to cover property taxes (and sometimes homeowners insurance). Here’s how it works:
1. Mortgage Payment Breakdown: Your monthly mortgage payment will typically consist of four components:
- Principal: The amount of money you borrowed.
- Interest: The cost of borrowing that money.
- Property Taxes: The amount needed to cover your annual property tax bill.
- Private Mortgage Insurance: A policy typically required for home buyers who have down payments under 20%.
2. Escrow Account: Instead of paying your property taxes directly to the county or municipality, your lender will collect a portion of those taxes each month and place it in an escrow account. When your property tax bill comes due, the lender will pay it directly from this account.
3. How It Impacts Your Monthly Payment: Property taxes can add a significant amount to your mortgage payment. For example, if your annual property tax bill is $3,600, your lender will divide that amount by 12, meaning an additional $300 per month is added to your mortgage payment. While this may seem like a manageable amount on its own, when combined with your mortgage principal and interest, it can increase your overall monthly payment.
How Property Taxes Can Vary by Location
It’s important to note that taxes can be higher in some neighborhoods due to local school districts or municipal services that require additional funding.
Before you finalize your home purchase, it’s crucial to research the property tax rates in your desired location. For example, a more expensive property might have a higher tax bill, which could significantly impact your monthly mortgage payment.
How Property Taxes Affect Your Long-Term Housing Budget
It’s easy to focus on the sticker price of a home and the mortgage rate, but property taxes can have a long-term impact on your finances. If your property taxes increase over time (which happens in many areas), your monthly mortgage payment could go up as well. This is because your escrow account may need to be adjusted to account for the higher taxes.
Conclusion
While property taxes might not be the first thing you think about when applying for a mortgage, they play a crucial role in your overall homeownership expenses. By factoring property taxes into your mortgage payment and overall budget, you can ensure that you're financially prepared for the costs of owning a home.
If you’re a first-time homebuyer or need more information about how property taxes might impact your mortgage payment, feel free to reach out. As a local mortgage broker, I can help you navigate the complexities of property taxes and ensure you’re making the most informed decision when buying your home.