Principal and interest make up the bulk of your mortgage payment. On some loans, you’ll only need to pay principal and interest to your lender each month, but your loan might also involve taxes and insurance. You should note that regardless of whether taxes and insurance are included in your loan, lenders typically combine principal, interest, taxes and insurance(PITI)when determining how much house they will approve you for.
Taxes
No matter where you live, you’ll need to payproperty taxeson your home. Taxes are one of the most overlooked parts of owning a home, and they can also be one of the most expensive. Property taxes go to your local government and fund things like public schools, roads, fire departments and libraries.
The amount you pay in taxes depends on the value of your home and the local amenities your community offers. Part of the reason you get anappraisalwhen you buy a home is so your local government can correctly calculate your taxes. Taxes can vary from year to year, and your county might require you to get a new appraisal every few years.
Tax assessors will value the property and charge homeowners the appropriate rate following tax authority standards. They calculate that value using either the mill levy or the assessed property value (which is based on local real estate market conditions).
Insurance
You aren’t legally required to havehomeowners insuranceto own a home. However, most mortgage lenders won’t give you a loan without insurance. Homeowners insurance protects you against damage from fires, break-ins and lightning storms, just to name a few examples. You may need an additional policy to protect yourself from damage caused by flooding and earthquakes.
You may need to buy a policy called a “rider” if you have something very expensive in your home that you want to protect. A rider is an extra clause on your homeowners insurance policy that extends your coverage limits to protect a high-value item, like a piece of jewelry or artwork. You may only be able to get a certain amount of compensation for losses in a single category under normal policy limits.
For example, you might have $10,000 worth of coverage for a burglary, but your policy might say that you can only use $1,000 of that for jewelry replacement. A rider extends your limits up to the full value of the item you want to protect.
Your homeowners insurance premium depends on a number of factors, including:
- Home location
- Home value
- Whether you live in an urban or a rural area
- How close you are to a fire department or police station
While costs vary per state, you should expect to pay about $3.50 for every $1,000 of your home’s value for insurance per year. For example, if you have a home worth $250,000, you’d pay about $875 per year for homeowners insurance. Location, age of the home and additional risk factors like owning a pool can increase the annual total.
Escrow
Your mortgage lender might take a certain percentage of your monthly payment for an escrow account. Anescrow accountholds what you owe in property taxes and insurance premiums. Lenders collect this money and pay for it on your behalf to ensure you keep up with your coverage and tax dues.
The specific amount you’ll pay in escrow depends on your property tax and insurance rates. Your lender may reevaluate your escrow deposits whenever your taxes or insurance change.
