If you're in the market to buy a home, you've probably checked out some online calculators to find out how much you can afford. The calculators likely asked you for the amount you plan to finance and used today's mortgage rate to calculate your principal and interest payments – the largest portion of your mortgage payment. This number will help get you started, but it doesn't account for all costs, hence the fine print seen in many of the basic calculators: "costs do not include taxes or insurance."
What are these tax and insurance costs and how can I budget for them?
In addition to the principal and interest you pay on your mortgage, you're also responsible for costs related to taxes and insurance. Together, these 4 components represent all the costs associated with your mortgage, typically referred as PITI (Principal, Interest, Taxes and Insurance). Principal and interest payments are relatively easy to calculate if you know the interest rate and the amount you plan to finance. Taxes and insurance, however, vary based on a variety of factors such as where you live, the value of your property and the amount of your down payment, and are often left out of the most basic equations.
Property taxes are charged by your local government and other entities and serve as major sources of income to fund their public services, such as education, parks and recreation and transportation. Each local government applies its tax rate to the value of your home to determine what you owe; where land is most valuable, such as Manhattan, NY, and San Mateo, CA, taxes are much higher. Visit CNNMoney's interactive map to see how tax rates compare across the country.
Note that your tax rate will adjust over time based on the funding requirements of your local government and the value of your home.
Buying a home is one of the biggest financial decisions you'll ever make. Knowing what to expect will help you budget appropriately and most importantly, bring you peace of mind.
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