The Cost of Property Taxes and Hazard Insurance

May 4, 2007 No Comments »

taxes and insurance

As home prices continue to flirt with near record highs, the cost of property taxes and hazard insurance can be overbearing.

For example, if you purchase a one-million dollar home these days, you can expect to pay around $15,000 or more annually for property taxes and insurance. Ouch!

That’s a large chunk of change, especially considering million-dollar homes in California are the norm for many popular metropolitan areas. Factor in that most people buying these caliber homes aren’t necessarily multi-millionaires either.

On a monthly basis, you’re looking at an additional $1,250, which is what a total monthly mortgage payment might cost folks in other, less expensive parts of the country.

Property Taxes Vary by State – NJ the Most Expensive, Hawaii the Cheapest

The annual property tax rate does vary by state, but as a general rule you can assume 1.25% to 1.5% of the purchase price to stay on the safe side, though it can be as low as 0.3% or as high as 2.4%.

Property taxes tend to be higher than average in states like Connecticut, Illinois, Nebraska, New Hampshire, New Jersey, Ohio, Texas, Vermont, and Wisconsin.

I believe New Jersey property taxes are the most expensive, with Texas not far off.

Conversely, property taxes are relatively dirt cheap in states like Alabama, Arizona, Arkansas, Hawaii, Louisiana, Nevada, New Mexico, South Carolina, Utah, West Virginia, and Wyoming.

As far as I know, Hawaii always seems to have the cheapest property taxes of any state in the nation, which is surprising given its location in the middle of the Pacific Ocean.

To find out the exact property tax rate in your area, contact your county tax collector for an estimate of your fully assessed property taxes. Or visit your county tax assessor’s website. The lender and/or escrow company should also be able to track down this info.

Most counties reassess the property tax rate each year, and the number is likely to be higher than what it was last year, or what the previous owners paid.

It should also be noted that property taxes are based on the purchase price, not the loan amount! This is one more reason to negotiate a lower sales price!

Tip: When using a mortgage affordability calculator, be sure to factor in these costs, which could make or break your loan application.

Estimating the Cost of Hazard Insurance Quickly

Then there’s hazard insurance, which is about 0.25% to 0.33% of the purchase price, paid annually. So if you’re looking to do a quick estimate on a home that sold for $500,000, the cost would be roughly $1,250 to $1,650 per year.

However, these premiums also vary by state, with the most notoriously expensive states being Florida and Texas, where hurricanes and tornadoes can wreak havoc on properties there (and the companies that insure them).

If possible, try to find out exactly how much insurance coverage you need by contacting the bank or mortgage lender directly. It can vary, and the earlier you know, the better you’ll be able to estimate your true housing expenses/mortgage payment.

Of course, what the bank requires might not be enough for your own insurance needs, so be sure to consider both their minimum requirements and your unique insurance comfort level.

In summary, make sure you factor in these expenses, as well as private mortgage insurance if applicable, and any other closing costs that you are required to pay.

Just because you’re in an option-arm or an interest-only mortgage doesn’t mean you can avoid paying your taxes and insurance in full each month (or semi-annually if not impounded).

And even states with cheap housing might have property and insurance costs that are so high they could exceed the principal and interest mortgage payment.

Many of these costs were overlooked when pushy loan officers and mortgage brokers squeezed overzealous homeowners into homes they later found out they couldn’t afford. Make sure you do your homework to avoid defaulting on your mortgage or worse, foreclosing on your home.

Remember, those ads you see banks and lenders advertise with the super low monthly payments don’t include taxes and insurance, and could even amortize negatively.

The takeaway here is that homeownership comes with a lot of costs, not to mention maintenance and any unforeseen repairs that could rear their ugly head once you close and in the years ahead. Be sure you can afford it!

Read more: How much mortgage can I afford?

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