The tax value of your home is not necessarily the price that you bought it for. Most tax assessments are done every few decades so you may be lucky that you have an old assessment bringing your taxes down for the time being. However, know that sometime in the future the county could reassess your property and the taxes could go up.
County, Town, and School District Tax
Your property taxes are usually paid to the county, township, and school district. Most places have the highest taxes due to the school district. This is due to the fact that almost all of school funding comes from property taxes. However the county and township also get taxes from retail sales and other revenue streams.
These property taxes vary widely from region to region. It may make a huge difference by just being across town. This should be a very important consideration when deciding on a home.
Monthly Payment (PITI)
Your monthly payment is not all paid to the bank. Below is a breakdown of the portions of your payment.
Principal and Interest (P&I)
The principle and interest is the part of your payment that actually pays off your loan. At an interest rate of 4.5%, just less than half of your monthly P&I is interest and the rest of it is repaying the principle. As a portion of your total monthly payment P&I could be only 40% of your whole payment. It is surprising to most people that your mortgage is such a small amount of your monthly payment. Keep this in mind when you are evaluating what you can afford.
Property Taxes (T) – Escrow
The property taxes that I mentioned before are paid incrementally over the year into an Escrow account. This Escrow account is an account that the bank has for you and is required to pay off certain debts or taxes. All year you pay into the account and at the end of the year the bank pays all of your property taxes for the year.
Homeowner’s Insurance (I) – Escrow
Just like the Escrow for property taxes, there is another Escrow account for your homeowner’s insurance. You are required by the bank to purchase a policy that will refund you the money to rebuild the house just as it is if there happens to be a major or minor accident that damages your home. Typical homeowner’s insurance policies run about $1000 a year and come out to ~$80 a month.
If you don’t put at least 20% down on your loan the mortgage company will require you to have mortgage insurance, which protects the bank if you end up defaulting. Once you have repaid the principle up to 20% the mortgage insurance goes away. Consider this potential added cost.
Just one more session of Buying Facts 101! In the next post, I'll talk about closing costs. Stay tuned!