Hidden Housing Costs: Taxes and Insurance Now Take 21% of the Average Mortgage Payment
"When people think about buying a home, the focus is on price, down payments, and the interest rate," wrote Jake Vehige, president of mortgage lending at Neighbors Bank, in a study published last week.
"But a growing share of today's housing payment isn't going toward building equity at all. In many U.S. metros, property taxes and homeowners insurance can consume more than one-third of the average monthly mortgage payment — and in some cases, nearly half," Vehige continued.
Disclosure note: Neighbors Bank (NMLS #491986) is a Columbia, Missouri-based national lender. Equal Housing Opportunity. Neighbors Bank is an affiliate of Three Creeks Media, which operates this website.
PITI-ful
When someone buys a home, they may hear their lender refer to "PITI." That's an acronym that stands for Principal and Interest (the interest payment plus paying down the amount owed), and (property) Taxes and (homeowners) Insurance premiums. For those who pay those taxes and insurance through escrow, PITI is their monthly payment.
There was a time when principal and interest payments dwarfed taxes and insurance. But that's often not the case now.
Geographical Location Makes a Big Difference
In the Pensacola-Ferry Pass-Brent, Fla., metro, taxes and insurance account for 43.6% of the average housing payment. Neighbors Bank modeled that calculation using recent home prices and a 30-year fixed-rate mortgage at a 6.59% interest rate.
For the average homeowner in Pensacola, with a monthly payment of $2,714, $1,531 went on maintaining the mortgage, and $1,183 on taxes and insurance. That's because Florida is especially prone to hurricane damage, so insurance is high.
Late last year, NPR reported, "Disaster costs are ... rising because people continue to move to coastal regions vulnerable to hurricanes and to forested areas prone to wildfires. That means more property is in harm's way. And inflation, which has hit the cost of building materials particularly hard, has made it more expensive to rebuild."
Residents of Decatur, IL, are the second-worst hit by high taxes and insurance. But the problem there isn't high premiums; it's high property taxes.
That's because the state relies heavily on property taxes to fund local services, keeping state general sales and income taxes relatively modest. "In Illinois, 40% of all local government revenue comes from property taxes, according to the Lincoln Institute for Land Policy," said the Office of Cook County Treasurer last October. "That compares with an average of 30% across the nation."
Less Costly Options
To minimize housing costs, Neighbors Bank recommends checking out interior states with low disaster risk and less reliance on property taxes. It names Utah, Colorado, and Nevada as prime examples.
However, even those aren't invariably a good bet. On Mar. 9, KTVB 7 ran the headline, "Once a beacon of cheap homes, Nevada has become a symbol of America's struggle with high costs." However, the worst housing affordability issues dog Las Vegas, while other cities and counties in the state may remain relatively inexpensive.
Perhaps surprisingly, urban Honolulu, HI has the lowest property tax and insurance burden nationwide, as a proportion of all housing costs. However, home prices in the state are notoriously high, so that likely skewed the calculation.
How to Avoid Shocks
Neighbors Bank suggests focusing on the entire PITI amount before making an offer on a home. With taxes and insurance premiums often making up between $2 and $4 of each $10 of a month's housing payment, one can no longer shrug off their costs.
And, of course, property taxes and homeowners insurance premiums can change each year, almost always upward. Yes, the mortgage payments (principal and interest) always stay the same with a fixed-rate mortgage.
But lenders have no control over charges levied by state and local governments or insurers. That means it's even more important to pay attention to these unpredictable variable costs.
Get an insurance quote before making an offer, and review property tax trends over recent years. There's a reason home affordability is currently such a hot issue. Don't get caught out!
