Increased home values, increased losses from natural disasters, and rising construction costs have all contributed to significantly higher property taxes and homeowner’s insurance premiums in recent years. As a result, more of your monthly mortgage payments are set aside to pay these expenses. Homeowners are searching for ways to offset these costs in order to pay their monthly housing costs.
Key Takeaways
- Variable costs like property taxes and homeowner’s insurance premiums comprise 35% of the average monthly mortgage payment.
- Rising construction costs and increased natural disasters contribute to higher homeowner’s insurance premiums.
- Downsizing or relocating are two possible solutions to reduce total housing costs.
What are Property Taxes and Homeowner’s Insurance?
Property taxes are ad-valorem taxes paid by real estate owners to the local government where the property is located. Typically paid annually, property taxes are calculated by taking a certain percentage of the assessed property value.
Homeowner’s insurance protects your home if it is damaged by a covered peril such as fire, burglary, or a tree falling on it. Homeowner’s insurance premiums are typically paid annually, semi-annually, quarterly, or monthly.
Homeowners with an escrow account attached to their mortgage pay a portion of their property taxes and homeowner’s insurance premium along with their regular mortgage payment to their lender. The lender then pays the property taxes and homeowner’s insurance premium on the owner’s behalf.
Escrow account
The mortgage lender sets up an escrow account, and a portion of the mortgage payment is placed in this account to pay property taxes and homeowner’s insurance premiums.
What Are the Average Total Housing Costs in the US?
According to “The State of the Nation’s Housing 2024” report from the Joint Center for Housing Studies of Harvard University, the all-in monthly costs, including property taxes and homeowner’s insurance, for the median-priced home is $3.096.
According to the U.S. Census Bureau, the median sales price for new houses in November 2024 was $402,600. Of the average monthly mortgage payment, an estimated 35% goes to variable costs like property taxes and homeowner’s insurance. However, in several major metro areas, about 25% of borrowers who use escrow accounts to pay their taxes and home insurance spent more than half of their monthly payments on these expenses.
Across the nation, property taxes and insurance exceed monthly mortgage payments for only approximately 9% of borrowers. However, this has increased dramatically from less than 4% of borrowers ten years earlier.
Why Have Property Taxes and Homeowner’s Insurance Become So Expensive?
Because property taxes are calculated as a percentage of the home’s assessed value, as the home value increases, the assessed value increases, leading to higher property taxes.
Homeowner’s insurance costs have increased due to several factors. For instance, construction labor and materials costs have increased, so repairing a damaged home costs more than in years past.
Also, the impact of natural disasters like hurricanes and wildfires has resulted in more rebuilding or repairs for damaged homes, leading insurance companies to pay out more claims, which leads to higher policy premiums.
How Are Homeowners Reacting to Higher Housing Costs?
Homeowners facing higher housing costs continue to look for ways to reduce those expenses. These include:
- Downsizing to a smaller, less expensive house
- Relocating to a more affordable location
- Withdrawing money from retirement savings to cover costs
- Using credit cards to get by
- Eating out less
- Deferring large purchases, including home maintenance
- Reviewing their insurance policies to reduce costs
The Bottom Line
Property taxes and homeowner’s insurance premiums continue to take a big chunk out of homeowners’ monthly mortgage payments. To offset these costs, homeowners are implementing various solutions, including downsizing, relocating, cutting back on expenses, and deferring large purchases. These efforts could help make homeownership more affordable for many homeowners.