Your full monthly payment: taxes, insurance, and HOA

What's included in a monthly mortgage payment?

A full monthly payment usually has four parts: principal and interest, property taxes, homeowners insurance, and mortgage insurance if your loan has it. If the home is in a homeowners association, the dues are a fifth cost, usually paid separately.

Principal pays down what you borrowed, and interest is what the lender charges for the loan. Those two stay the same for the life of a fixed-rate loan. The others don't.

How do property taxes affect your payment?

Property taxes are often the second-largest part of the payment. They're set by your county, city, school district and other local taxing bodies, and they vary a lot from place to place, even between neighboring areas.

When you have an escrow account, your lender collects a twelfth of the yearly tax bill with each payment and pays the bill when it's due. To estimate yours, look up the tax rate for the home's address and apply it to the price you're paying, not just to the seller's last bill.

Why might your property taxes be higher than the seller's?

Because the home is often reassessed after a sale, based on what you paid. If the seller owned the home for years, their taxable value may be well below today's price.

The seller may also have had exemptions, such as a homestead exemption for a primary residence or exemptions for seniors or veterans, that don't carry over to you. Many areas let you apply for your own homestead exemption once you move in, so check what's available and the deadline to file.

How much is homeowners insurance?

It depends on the home, its location, its age and condition, and the coverage you choose. Homes in areas with more storms, wildfires or other risks cost more to insure, and premiums in many areas have risen quickly in recent years.

Get a real quote before you make an offer, or at least before your inspection period ends. Your lender will require insurance before closing, and it's one of the few costs you shop for yourself. If the home is in a flood zone, flood insurance is a separate policy and adds to the cost.

When do you pay mortgage insurance?

On a conventional loan, you usually pay mortgage insurance if you put down less than 20%. FHA loans have it no matter your down payment. It's added to your monthly payment, and how long you pay it depends on the loan. Mortgage insurance explains what it costs and how to get rid of it.

What about HOA dues?

If the home is in a homeowners association, you'll pay dues for shared costs like common areas, amenities and sometimes exterior maintenance or insurance. Dues are usually paid to the HOA directly, not through your mortgage payment, but lenders count them when deciding how much you can borrow.

Ask for the current dues, what they cover, and whether any special assessments are planned. A condo's dues can include things a house owner pays separately, so compare the full cost, not only the dues.

Why can your payment change if you have a fixed rate?

Because taxes and insurance can change even when your rate doesn't. Once a year, your servicer reviews your escrow account. If taxes or insurance went up, your payment goes up to cover the new amounts, and you may be asked to make up any shortage. If they went down, your payment can drop, and you may get a refund.

The first year after you buy is when the change is most likely, since your tax bill may reflect a new assessment. Setting aside a little extra in the first year can soften that. Escrow: keep it or waive it? explains how the account works.

How do you estimate your full payment before you buy?

Start with principal and interest for the loan you're considering, then add the monthly share of the property taxes at your purchase price, a real insurance quote, any mortgage insurance and any HOA dues. The payment calculator adds these up for you.

Lenders use the same full payment to decide how much you can borrow, so it's worth getting it right early. How much house can I afford? shows how it fits into your debt-to-income ratio.

Quick answers

What does a mortgage payment include?

Usually principal, interest, property taxes, homeowners insurance and any mortgage insurance. HOA dues are usually paid separately.

Why did my mortgage payment go up if I have a fixed rate?

Most likely your property taxes or homeowners insurance went up, and your escrow payment rose to cover them.

Will my property taxes be the same as the seller's?

Often not. Many areas reassess the home after a sale, and the seller's exemptions don't carry over to you.

Are HOA dues part of my mortgage payment?

Usually not. You pay them to the HOA, but lenders count them when deciding how much you can borrow.