The typical mortgage payment on a home loan is comprised of principal, interest, taxes, and insurance (also known as “PITI”). The portion of the mortgage payment relating to principal and interest are governed by your loan documents. If you have a fixed-rate loan, the principal and interest payments will remain the same throughout the term of the loan. If you have a variable rate loan (or an ARM), the principal and interest payments will only adjust at fixed intervals. In either scenario, the terms of your principal and interest payments are set from the moment the loan is originated, which differs entirely from the portion that makes up taxes and insurance! Property taxes and insurance premium payments can fluctuate year to year and play a significant role in increasing or decreasing your monthly payments.
How can property taxes and insurance fluctuate?
It’s important to understand that property taxes and insurance premiums are yearly payments to the local government and insurance carrier, respectively. Your lender collects an estimate of these annual payments from the borrower on a monthly basis to pay to the local government insurance carrier, as applicable, to help borrowers budget their expenses, but these estimated monthly amounts are always subject to change based on changes in property taxes and insurance premiums due.
Property taxes can fluctuate because of changes in your “assessed value”. The state calculates your assessed value each year and multiplies that figure times the property tax rate to come up with the property taxes due. An assessed value is calculated by taking into a variety of factors such has size, location, age, and construction type. The locality will also investigate how property values in the area have increased to get a sense of how assessed values should trend on a general basis. When your assessed value rises, your property taxes due and payable rise as well. Note: “assessed value” may also be called net taxable value or appraised value depending on your county.
Insurance contracts can fluctuate due to pricing or coverage changes. Insurance contacts have a 1-year term, which means once the 1-year term expires, the carrier can change the price (even if the insurance coverage is the same). Your carrier may want to increase your insurance premium because your area was recently impacted by a natural disaster or your needs may have changed (for example, you may be looking to increase the replacement value coverage due to inflation). You can learn more about the basics of insurance coverage by reading our article here.
Here’s 3 tips to keep Taxes and Insurance costs from rising:
Tip #1: Apply for a Homestead Exemption (Property Tax)
Your primary residence is eligible for a property tax break through a homestead exemption. Homeowners apply for a homestead exemption in the beginning of the calendar year after they buy their home. For example, if a homeowner buys a primary residence in December 2022, the homeowner will apply for a homestead exemption in 2023. Please read our article on Homestead Exemptions for an in-depth look at how to apply and the potential savings.
Tip #2: Contest your Assessed Value (Property Tax)
Many property owners don’t realize, but property owners have the right to contest the assessed value of their home if they are dissatisfied with the amount. Typically, the appraisal district will notify homeowners of their appraised value around April or May, the timing of which may vary based on your state. Once notified, property owners have until the notice deadline (typically 30 days from receipt of the assessed value) to contest the assessed value and beginning contest proceedings. Residents in Austin have seen their assessed values increase as much as 30-40% from 2021 to 2022, which ends up costing the property owner thousands more each year than originally anticipated. Contesting property taxes may not result in a 0% year over year increase, but if argued properly, the property owner should be able to reduce the overall increase (i.e., from a 30% increase to a 10% increase). Be sure to check with your state’s guidelines for exact details on deadlines and necessary forms that need to be completed.
Tip #3: Use a Broker Each Year to Find The Most Competitive Pricing (Insurance)
As noted above, homeowners insurance is a product that property owners have to buy ever year. There’s no guarantee that the insurance you buy today will be priced the same (or even available) next year. Having a great insurance broker, who can re-price your policy on an annual basis, can not only help ensure that you keep costs from rising but can actually lower your premium payments year over year because insurance brokers can shop your policy with so many carriers. You never know when a reputable insurance company is looking to gain market share by undercutting the competition on price. Checking in with your insurance broker every year could mean big savings over the term of the loan.
The Bottom Line
The main takeaway from this article is that when it comes to property taxes and insurance, you aren’t powerless. Don’t just accept that these costs should increase every year and understand that you have options available to keep these costs in check. Implementing these simple tips can save you thousands of dollars during your period of homeownership.
