While most home buyers focus on the price for a home and their mortgage rate, they tend to ignore two big — and nonnegotiable — parts of their housing payment: property taxes and homeowners insurance. A recent study by Neighbors Bank found that those two bills make up about 21 percent of homeowners’ average monthly payment. In some markets, those costs rise to one-third or nearly one-half the total payment.
“Home prices and mortgage rates still get most of the attention, but a growing share of the monthly housing payment is going toward costs that don’t build equity at all,” said Jake Vehige, president of mortgage lending at Neighbors Bank in Columbia, Missouri. “When buyers are trying to decide what’s affordable, it’s important to look beyond just the home price and interest rate and understand the full PITI [principal, interest, taxes and insurance] amount.”
Buyers often use online calculators to estimate their housing payments, but Steve Combs, area manager of Cornerstone Home Lending in California, Maryland, warns that those calculators often don’t include taxes and insurance.
“Even if they do include those items, they can be vague estimates,” Combs said. “That leads to sticker shock when we do the actual calculations for a specific property.”
Lenders can look up tax records and home insurance premiums for homes in the price range and area where buyers plan to look, Combs said, so they can get a better idea of those costs.
Both property taxes and home insurance costs have increased in D.C. and its suburbs in recent years. Property taxes are higher in part because of rising home values, while home insurance costs are up because of several factors.
“The costs to repair and rebuild a home after a loss have increased sharply,” said Angela Ripley, president of VW Brown Insurance Service in Columbia, Maryland, and an executive committee member of the Independent Insurance Agents and Brokers of America. “The labor, materials and construction costs have risen due to inflation. Also, there are more extreme weather events even in the Mid-Atlantic that are causing an increase in the number of losses and making claims more expensive.”
Ripley describes a “perfect storm” of increased home insurance premiums, exacerbated by higher reinsurance costs for insurance carriers and an uptick in fraudulent lawsuits that generate expenses, which are passed on to homeowners.
“All insurance companies must buy reinsurance, and there are only about three reinsurance companies,” said William Hoffman, president of Howard and Hoffman, an independent insurance agency in Washington. “When they take a hit, they raise rates for everyone.”
Given the impact of property taxes and home insurance on housing payments, buyers should take those costs into consideration as they shop for a home, said Jack Shorb, a real estate agent with Corcoran McEnearney in Washington.
“Most buyers, especially first-time buyers, are taking out a loan to buy their home, so they need to work with a lender who can provide them with a variety of scenarios depending on where they want to buy,” Shorb said. “A lot of buyers in this area look at D.C., Northern Virginia and Maryland, especially if their commute doesn’t change a lot between jurisdictions.”
While property taxes vary by city and county, home insurance costs are specific to individual properties, he said.
“There’s more variation in closing costs based on jurisdictions,” Shorb said. “If anyone is making a location decision based on taxes, it’s often more likely to be about income taxes rather than property taxes. If someone is neutral about location otherwise, they’re likely to choose Virginia for its lower income taxes.”
Combs recommends that buyers think about their maximum comfortable monthly housing payment.
“Then we look at all the expenses, including taxes and insurance, plus homeowner association dues along with their loan costs, to estimate their property price point,” he said.
Check property taxes before making an offer
Although real estate listings commonly include property taxes, Combs said it’s best to ask a lender to look at actual tax bills because the previous owners may have had exemptions, such as for veterans, that lowered their payment.
“A lender or real estate agent can also estimate what taxes may look like after a sale,” Vehige said. “This is especially important in markets where reassessments occur after a home changes hands.”
Vehige recommends comparing property tax histories of similar homes to determine whether the assessed value is likely to rise after the purchase.
In addition, for buyers not committed to a specific neighborhood, he recommends comparing property taxes for similar houses in different areas.
“Two homes with the same purchase price can have very different monthly payments simple because they sit in different counties, school districts or tax jurisdictions,” Vehige said.
After you buy, he said, it’s important to be vigilant about tax assessments and the process to challenge them if your assessment appears too high.
Start early to shop for home insurance
A lender can estimate homeowners insurance premiums based on similar homes in the price range and location where you’re looking, or you can contact an insurance agent. You can also contact an independent insurance agent before an offer is written to get a ballpark quote for insurance premiums, Ripley said.
Once you have a signed purchase contract, it’s important to contact an insurance company or independent agent as soon as possible to line up your policy, Shorb said.
“It’s best to have an insurance broker run scenarios and get quotes from two or three companies during the contingency period, when you can still back out of the contract just in case you can’t find a reasonably priced policy,” he said. “Sometimes buyers must talk to three to five companies to find someone who will insure a home, often because they see a number of claims made by the prior owners.”
Home insurance companies use aerial imagery of homes to check for tree overhang and will not approve a policy in some cases when they see too many branches around a property that could cause damage in high wind, according to Hoffman. They also look at the age of the roof, which is preferred to be less than 15 years old, he said.
“It used to be that insurance companies only looked at your prior claims, but now they look at claims made by previous owners before approving and pricing a policy,” Hoffman said. “In one case, they found previous water damage claims, so the insurance company wouldn’t write the policy until the buyers installed a water shutoff valve.”
In addition, your lender can research whether you need a flood insurance policy, which is separate from your homeowners insurance and one more bill you may need to pay.
Ways to control home insurance costs
Home insurance costs vary by location and property, which could influence where you buy or which property you choose.
“Insurance is regulated at the state level, so there are differences in rates,” Hoffman said. “In Northern Virginia, home insurance is about 20 percent less than in D.C. and Montgomery County [Maryland] primarily because there are not as many companies offering policies in D.C. Montgomery County is more pro-consumer in its regulations, so insurance companies raise their rates to protect themselves.”
To keep your insurance costs in check, keep your home and auto insurance policies with the same company, because most insurance companies offer significant discounts for bundling policies, Ripley said.
“Buyers should also consider proactive measures and resiliency reinforcements they could implement in the home that may help lower their costs, such as fortified roofs, windows and landscaping to protect their property,” Ripley said. “When looking at homes, look for or consider adding loss-mitigation features such as a battery backup on a sump pump, an automatic water shutoff valve and, potentially, heat detectors in the garage.”
In addition, Ripley reminds homeowners that they should review their policy annually or when they make a significant change to their property, since small improvements may help you reduce your long-term costs.
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