How Do Property Taxes Impact Your Monthly Mortgage Payment and Overall Cost of Homeownership?

Finding the perfect home is exciting. Whether you're searching for your first home, upgrading to accommodate a growing family, or settling into a new community, there's plenty to consider along the way.

While the purchase price and mortgage interest rate often receive the most attention, there's another important expense that deserves a spot in your homebuying budget: property taxes.

Property taxes can influence how much you pay each month, how much home you can comfortably afford, and the overall cost of owning your property.

Understanding how they work can help you make informed decisions before you buy and prepare for the expenses that come with homeownership.

Let's break it down.

What Are Property Taxes?

Property taxes are taxes assessed by local governments on real estate, including residential properties.

These funds help support public services and community resources, which may include:

• Public schools

• Roads and infrastructure

• Emergency services

• Parks and community facilities

• Local government operations

The amount a homeowner owes depends on several factors, including the property's assessed value, local tax rates, and any exemptions or deductions that may apply.

Because property taxes are determined locally, the amount owed can vary considerably from one community to another.

That means two homes with identical purchase prices could have very different annual property tax bills.

How Do Property Taxes Affect Your Monthly Mortgage Payment?

When most people think about a mortgage payment, they think about paying back the money they borrowed to purchase their home.

However, the total monthly mortgage payment often includes more than principal and interest.

You may hear mortgage professionals refer to the four main components of a mortgage payment as PITI:

Principal: The portion of your payment that reduces the amount you owe on your mortgage.

Interest: The cost of borrowing money from your lender.

Taxes: Property taxes assessed by your local government.

Insurance: Homeowners insurance and, when applicable, mortgage insurance.

For many homeowners, property taxes and homeowners insurance are collected through an escrow account.

An escrow account allows your mortgage servicer to collect a portion of these expenses each month and pay the bills on your behalf when they're due.

Instead of setting aside money independently for a large property tax bill, you're contributing toward that expense throughout the year.

An Example of How Property Taxes Affect Your Payment

Let's say you're purchasing a home with an estimated principal and interest payment of $1,500 per month.

The property's annual tax bill is $3,600, and homeowners insurance costs $1,800 annually.

Here's how those expenses could affect your estimated monthly payment:

Although your principal and interest payment is $1,500, your estimated total monthly payment would be $1,950.

That's a $450 difference!

This example illustrates why it's important to consider more than the mortgage loan amount when determining your homebuying budget.

Note: This example is for educational purposes only. It does not include mortgage insurance, HOA fees, or additional escrow deposits that may apply.

Can Property Taxes Make Your Mortgage Payment Increase?

Yes! And this is something homeowners should understand, especially if they have a fixed-rate mortgage.

A fixed-rate mortgage generally keeps your principal and interest payment consistent throughout the loan term.

However, that doesn't necessarily mean your total monthly mortgage payment will always remain the same.

Property taxes can change as a result of:

• Changes in assessed property values

• Adjustments to local tax rates or levies

• Changes to available exemptions or deductions

• Property improvements that affect assessed value

• Reassessments following a home sale, depending on local rules

If your property taxes increase, the amount collected through your escrow account may need to increase as well.

For example, imagine your annual property tax bill increases from $3,600 to $4,200.

Your estimated monthly property tax contribution would change from $300 to $350.

That's an additional $50 per month, or $600 annually.

Your mortgage interest rate hasn't changed, but your total monthly payment may have.

What Happens If Your Escrow Account Doesn't Have Enough Money?

Mortgage servicers generally review escrow accounts annually to determine whether the amount being collected is sufficient to cover anticipated property taxes and insurance expenses.

This process is called an escrow analysis.

If property taxes increase more than expected, your escrow account may experience a shortage.

An escrow shortage occurs when the account contains less money than the amount needed to meet its required target balance.

Depending on the circumstances and applicable requirements, your mortgage servicer may adjust your monthly escrow payment and collect additional funds to address the shortage.

This means a homeowner could experience a payment increase for two reasons at the same time:

1. The estimated amount needed to cover future property taxes has increased.

2. Additional funds are needed to make up for an existing escrow shortage.

Understanding your annual escrow statement can help you identify why your monthly payment changed and prepare for future adjustments.

Do Property Taxes Affect How Much Home You Can Afford?

Absolutely.

When determining how much home you can afford, it's important to look beyond the listing price.

Consider two homes listed for $300,000.

Home A has estimated annual property taxes of $2,400.

Home B has estimated annual property taxes of $4,800.

Here's how that difference could affect your monthly budget:

Although both homes have the same purchase price, Home B comes with an additional $200 in estimated monthly property taxes.

Over five years, that's a $12,000 difference in property tax expenses, assuming neither property's taxes change.

This is why understanding local property taxes can be particularly helpful when comparing homes in different neighborhoods, cities, or counties.

A home with a lower listing price isn't necessarily less expensive to own when all housing expenses are considered.

Do You Still Pay Property Taxes After Paying Off Your Mortgage?

Yes.

Property taxes are an ongoing responsibility of homeownership, regardless of whether you have an active mortgage.

Once your mortgage is paid off, you no longer have that monthly principal and interest payment. However, you're still responsible for paying applicable property taxes.

If your mortgage servicer previously paid those taxes through an escrow account, you'll generally need to make arrangements to pay them directly after the loan is paid off.

This is an important consideration for homeowners planning their long-term finances or preparing for retirement.

How Can Homebuyers Prepare for Property Tax Expenses?

Understanding property taxes before purchasing a home can help reduce surprises later.

Here are a few ways to prepare:

1. Research the property's tax history.

Review available property tax records to get an idea of what the current owner has paid. Keep in mind that your future taxes may differ, particularly if the property is reassessed or the previous owner qualified for exemptions that won't apply to you.

2. Ask about available exemptions.

Depending on where you live, you may qualify for property tax exemptions or deductions based on factors such as primary residence status, age, disability, or veteran status.

Check with your local taxing authority to learn what may be available and how to apply.

3. Budget for the complete monthly payment.

Consider principal, interest, taxes, insurance, and any applicable mortgage insurance or HOA fees when evaluating affordability.

4. Prepare for potential increases.

Property taxes can change over time. Leaving some flexibility in your monthly budget may help you manage future adjustments.

5. Work with a knowledgeable mortgage team.

A mortgage professional can help you understand how estimated property taxes factor into your monthly payment and overall homebuying budget.

Understand the Full Picture With Ruoff Mortgage

Buying a home is about more than finding the right property. It's also about understanding the financial responsibilities that come with it.

Property taxes may not be the first thing you think about when browsing listings, but they play an important role in determining your monthly housing expenses and long-term cost of homeownership.

At Ruoff Mortgage, we're committed to helping homebuyers understand their financing options, evaluate estimated monthly payments, and approach homeownership with confidence.

Whether you're buying your first home or preparing for your next move, our team is here to help you understand the numbers behind your homebuying journey.

Ready to explore your home financing options? Connect with Ruoff Mortgage today!

Ruoff Mortgage Company, Inc., d/b/a Ruoff Mortgage, is an Indiana corporation. For complete licensing information visit www.nmlsconsumeraccess.org. This is not an offer for extension of credit or a commitment to lend. All loans must satisfy company underwriting guidelines. Information and interest rates are subject to change at any time and without notice. Equal Housing Lender. NMLS#141868.