Definition:
Taxes and insurance refer to two key costs that homeowners are responsible for: property taxes paid to local governments and homeowners insurance that protects against damage or loss. These costs are often included in the monthly mortgage payment through an escrow account.
Example:
Lisa buys a home with a monthly mortgage payment of $1,500. Of that amount, $1,100 goes toward the loan principal and interest, while $400 covers taxes and insurance—held in escrow and paid by her lender when due.
Explanation:
When buying a home, it’s not just the mortgage that matters. Property taxes and homeowners insurance are recurring expenses that can significantly affect affordability.
- Property taxes are charged by local governments (city, county, or school district) based on the home’s assessed value. These funds pay for public services like schools, roads, and emergency services.
- Homeowners insurance protects the property against risks like fire, theft, or natural disasters (depending on coverage). Most lenders require buyers to have insurance before finalizing a mortgage.
Lenders often collect taxes and insurance along with the monthly mortgage payment and hold them in an escrow account. When the bills are due, the lender pays them on the homeowner’s behalf.
Buyers should carefully review these costs during the home-buying process because they can change yearly. For example, taxes might go up if property values increase, or insurance premiums might rise after a claim or policy change.
Why is Taxes and Insurance Important in Real Estate Transactions?
Understanding taxes and insurance is crucial for budgeting and avoiding surprises after closing. Buyers who overlook these costs may struggle with higher monthly payments. For sellers, accurate disclosure of taxes and insurance helps manage buyer expectations. In short, knowing these figures helps both parties make informed, financially sound decisions.