Property Taxes & Insurance: The Mortgage Payment Trap Nobody Warns You About

Hey guys, welcome back to Mortgage Matters in Minutes. I'm your host Brent Rasmussen, owner of Mortgage Specialists. Today is our 209th episode and we are going to be recovering property taxes and homeowners insurance. Why? Because they've been a big factor of increasing and making your payment even higher than what you've seen in the past. At least that's where things are happening here in Omaha, Nebraska. But we're going to keep it simple and kind of go through what breaks down homeowners insurance and property taxes and how that's affected in your payment and how escrows are collected. Because sometimes people hear the word homeowners insurance taxes, escrow, and what do these things mean? And that's what we're going to chat about here today. especially our first-time home buyers aren't anticipating always the amount of money that they might need at closing or they also might not be anticipating the taxes and insurance included in their payment while thinking their loan payment is all that they need to make. So, let's first talk about homeowners insurance or house insurance. It's also called hazard insurance and basically it covers wind, fire, hail, any major problems with your property. The insurance is going to charge a deductible for you to pay to get those things fixed. And homeowners insurance has been changing through the years in regards to separating out deductibles and having higher deductibles for wind and hail, especially here in the Omaha, Nebraska area because we have lots of storms, wind storms, hail storms, tornadoes that have occurred over the past 5 10 years. So when we are running estimates for you to become preapproved, we're trying to get as accurate as we can. here recently, I would tell you to expect to pay for an annual homeowner's insurance policy about 1% of the price of the home. So, if it's a $300,000 home, about $3,000 a year in homeowners insurance. $500,000 home, $5,000. It could deviate up or down depending on some variables. That's kind of a good rule of thumb to kind of go off of there as well. For homeowners insurance at closing, they require you to prepay a whole year in advance. And why is that? Because the risk is greater. The home is worth a significant amount. And they want to know if for some reason the insurance gets canceled. The lender wants to give enough time to prepare you for new insurance, different insurance, so on and so forth. So, at closing, that gets to be a little bit more expensive, adding another three, four, five, $6,000 to prepaying that insurance in advance. So, next is property taxes. And those are charged here depending on your county and your state and your school district all pay into property taxes. So they're calculated based on your value of your home and they multiply it by a tax levy which is a number anywhere from about 1 to 3%. So that's what calculates out your dollar amount of what your property taxes are every year. Here in the Omaha metropolitan area, we collect taxes in the aars and differ than the rest of the country where we have to prepay taxes in advance before or at closing before you're making your regular monthly payments where in other counties across the country, they're getting a credit at closing for the property taxes and then they pay those moving forward as well. So, it gets confusing here locally to say, why am I putting so much money at closing towards property taxes if I'm paying it per month? It's just the way the accounting works here in the two counties of Douglas and Sarpy that we live in here locally of how those taxes are structured for closing. So, what do we do with property taxes? What do we do with homeowners insurance? We make sure and get those accounts funded through an escrow account. So, at closing, so much money is going to go into that escrow account to build up that savings account. Then, they're going to pay out items or pay out insurance and taxes as they go. So, you pay in every month a certain amount for property taxes, a certain amount for house insurance, and throughout the year, a couple times they'll pay property taxes, and once a year they'll pay house insurance. And they call that an escrow account. So, it's a savings account the mortgage servicer holds for you. So, what they look at each and every year is they review your homeowner's insurance and taxes and they say, "Has your insurance gone down or has your taxes gone down or if they've gone up, what do we do?" And they look at that about the yearly annual time frame of when you bought your house or closed. They're going to look at that and see what have insurance gone to in taxes and adjust your payment accordingly. Generally speaking, your homeowner's insurance and your property taxes continue to go up. So, your payment is going to go up or you can take a lump sum of money, make up that difference and put it into your escrow account so there's enough there for them to pull out to pay your taxes and your insurance basically. So, that's just simply called an escrow account. You'll see that on the monthly mortgage statement showing, okay, principal and interest is this line item, homeowners insurance is this line item, taxes is this item, and then you'll see your balance of your escrow account so that you know money is getting placed into that account to be paid for your homeowners insurance and property taxes at a later date. I know that takes on a lot of different unique variables, different unique words. trying to keep it as simple as possible to understand that when you make your larger mortgage payment, generally speaking, it includes homeowners insurance and taxes. That amount gets paid into an escrow account and then the escrow account pays for your property taxes and homeowners insurance. Obviously, if you put 20% down, you can choose to pay your own homeowners insurance and your own taxes, not your payment. But sometimes that's hard for people to budget for and plan for three, four, five, $6 thousand a couple times a year when they're least expecting it as well. So the big thing to chat about here today is when you're planning for your payment, making sure we're estimating enough for homeowners insurance and taxes because that amount can be nearly as much as your principal and interest of your mortgage payment. So factoring in the right numbers definitely prepares you for house shopping and what a payment is really going to look like. And then also expecting those same numbers at closing to show not only do you owe money for a down payment, but you also have to pay for your homeowners insurance and taxes at closing as well. Again, I'm Brent Rasmussen, owner of Mortgage Specialists. Feel free to call me anytime, 402-991-5153, and check us out on our website at mtg-specialists.com. And make it a great day. Thanks everyone. Mortgage Specialists, driven, trusted, reliable.