The median monthly cost of homeownership is $1,672, according to the U.S. Census Bureau’s latest American Community Survey (2021). The median amount may vary by state (for example, homeowners in California and Hawaii pay more than $2,500, while residents of Arkansas and Indiana have a median monthly cost that’s less than $1,200).
However, first-time buyers can be in for a nasty surprise when the mortgage amount is higher than they thought it would be. “There’s a degree of misunderstanding regarding what a mortgage is – which is only the principal on the loan plus interest – and many buyers don’t realize they also need to budget for other costs that will be paid to the lender each month with the monthly payment,” explains Candice Williams, a realtor at Coldwell Banker Realty in Houston, TX.
In fact, she says it’s not uncommon for some buyers to get an offer accepted and then contact their lender to find out what the monthly total payment will be. “However, buyers need to ask questions and ensure the know exactly what they will owe each month before putting an offer on a home.”
So, why would the mortgage amount be different? For many first-time buyers, mortgage terminology can be confusing. “For example, technically, the property taxes and homeowners insurance are separate from the mortgage payment,” says Steve Hill, lead mortgage broker at SBC Lending in Fullerton, CA. “However, the lender handles paying taxes and insurance many times, and when they do, most people refer to the total payment of mortgage and taxes and insurance as their “mortgage payment.”
Below, we’ll cover some of the things – including property taxes and homeowners insurance – that could cause your total mortgage payment to be higher than you thought.
PITI (Principal, Interest, Taxes, Insurance)
There’s a common acronym that can help you remember what is usually included in a monthly mortgage payment: PITI: principal, interest, taxes, and insurance. “You can avoid surprises in your monthly payments by making sure to account for each of these four categories,” Dan Dadoun, president at Silverton Mortgage in Atlanta, GA, tells us. And if you’re using online tools like a mortgage calculator, he says you need to be sure it accounts for taxes and interest along with the basic principal and interest. “Instead of doing the guesswork yourself, you can get a clear picture of how each of these variables may affect your monthly payment amount by speaking with a trusted mortgage professional who knows the ins and outs of your specific financial situation and the loan programs you qualify for,” Dadoun says.
Let’s break down interest, taxes, insurance, and other factors that can determine your monthly mortgage amount.
Market Conditions Affecting Your Interest Rate
If, during the process of looking for a new home, the market takes a turn for the worse, this may be reflected in your mortgage amount. “When the borrower’s loan file is first submitted to the lender, the interest rate is usually ‘floating’ and is not set in stone until it is ‘locked in,” says David A. Krebs, principal broker at DAK Mortgage in Miami FL. If market conditions worsen from the time you submitted the loan and the time it was locked in, your interest rate will probably be higher.
Jason Lerner, VP, area development manager at George Mason Mortgage, a subsidiary of United Bank, tells us that market conditions (interest rates) over the past 16 years are as volatile as they’ve been at any time in his 20-year career. “We have had times where interest rates have increased half of a percent in one day, so an estimated monthly mortgage payment prepared early in the week could be very different by the end of the week.”
To keep up, make sure you’re getting a real time updated mortgage estimate before you make an offer on the home that you’re interested in. “If the negotiation on the offer takes an extended amount of time, get an updated estimate before finalizing your offer with the seller.” And Lerner says your mortgage professional should present an estimate based on the current market conditions, but also show how an interest rate increase could impact your monthly payment. “Also, make sure you know if your interest rate is locked or have an agreed upon rate lock strategy with your mortgage professional,” he says.
Future Changes to Your Interest Rate
If you have a 30-year fixed rate mortgage, it won’t change during the life of the loan (although your taxes and insurance might fluctuate). However, if you get an adjustable-rate mortgage (ARM), it’s only fixed for a specified period of time, and then, the rate can go up or down. “Typically, with adjustable-rate mortgages, the initial interest will be lower than fixed-rate mortgages, explains Brandon Snow, Charlotte, NC-based executive director of mortgage strategy at Ally Mortgage. “But when it enters an adjustable period, it will often rise, equating to a slightly higher monthly payment.”
How much you pay in property taxes depends on where you live, and how much your house is worth. “This amount can change from year to year, and some cities, counties, and states have higher property taxes than others, which may affect your monthly payment,” explains Dadoun.
For example, according to data from Lending Tree, homeowners in Birmingham, AL pay an average of $995 in annual property taxes, while those in Pittsburgh, PA pay an average of $2,671. Homeowners in Los Angeles pay significantly more (average $5,214), and New Yorkers pay a whopping $9,091 on average.
However, according to Lerner, the property taxes for a specific property could also change based on how recently the home was assessed by the tax authority. “It is important that when the mortgage professional prepares an estimate, they should verify exact taxes with the local taxing authority to ensure accuracy and see when the home will be next assessed by the tax authority to prepare for any future property tax increases.”
There are two primary types of homeowner’s insurance: dwelling and personal property. “Dwelling coverage protects your house, while personal property covers the items inside your home,” explains Snow. Although the price can fluctuate based on your location and level of coverage, he says the average homeowner pays approximately $1,300 a year. As with taxes, the amount can vary greatly, with homeowners in some states, like Alaska, Delaware, Hawaii, Idaho, Maine, Nevada, and New Hampshire paying less than $100 a month. However, in Nebraska, the monthly cost is closer to $250 a month, and homeowners in Oklahoma pay more than $300 monthly.
In fact, Jennifer Beeston, SVP of mortgage lending at Guaranteed Rate in Coral Springs, FL, tells us that in some parts of the country, homeowners insurance and taxes can be more than the mortgage payment. “I always advise my clients to get a homeowners insurance quote before they write an offer on a house, as the monthly insurance cost could be a deal killer.” She also recommends buyers to be on the lookout for flood zones since these areas add yet another monthly cost.
In addition to the riskiness of the home, Lerner notes that your insurance can be increased at the discretion of your insurance provider. “Also, after a homeowner makes a claim with their insurance provider, their policy may increase, increasing their monthly mortgage payment,” he says.
If your down payment is less than 20%, you can expect to also pay mortgage insurance – and it’s not extra protection for your home. Instead, it protects the lender if you’re unable to maintain your monthly payments and the house goes into foreclosure. “The amount of monthly mortgage insurance required to be paid is determined by several risk factors, such as your credit score, how close the down payment is to 20%, and how much of your monthly income is spent on your debt – including the new mortgage.” Lerner explains.
And if any of the above factors change, he says the amount of mortgage insurance you pay each month will also change. “Prior to making an offer on a home, a homebuyer should get an updated estimate from their mortgage professional for the specific property to make sure no changes in these risk factors have impacted their mortgage payment,” he advises.
Issues Revealed During the Underwriting Process
When you purchase a home, your file goes through the underwriting process, and if any red flags are discovered, this can change your monthly mortgage amount. “For example, the lender may conclude that the borrower’s debt-to-income ratio (DTI) is higher than anticipated,” says Krebs. And this makes you a riskier borrower. “Or there may be an issue with the property – say, if the property is a condo and there are issues revealed regarding the health of the condo association that increases the risk to the lender.” He says your interest rate may increase to compensate for the newly discovered risk.