Budgeting for Taxes and Insurance
Your monthly Glossary Term: home payment is made up of four parts: Glossary Term: principal, interest, taxes, and insurance (known as PITI). The principal and interest is paid to your Glossary Term: lender, while the Glossary Term: property taxes and Glossary Term: homeowners insurance are paid to third parties.
As part of the initial home loan requirements, you may choose to (or be required to) set up an Glossary Term: escrow account with your lender and pay taxes and insurance monthly along with your mortgage payment. An escrow account works like this: Each month, you place your prorated property tax and homeowners insurance payments into an account managed by your lender. When these bills are due (usually once or twice a year), your lender makes the payments on your behalf by withdrawing the appropriate amounts from the escrow account and sending to the appropriate third party.
If you don't have an escrow account, it's a good idea to set up a savings account just for your taxes and insurance to ensure that you have the appropriate funds set aside when the bill comes.
Your insurance company may offer a discount if you pay the full annual premium in one lump sum payment as opposed to monthly. Likewise, you can pay your property tax once or twice a year, but this may also be a large bill to plan for (depending on where you live and the value of your home).
Homebuyer tip:To estimate your property tax before you buy, call your county Glossary Term: assessor's office or visit their website. They should be able to tell you the property Glossary Term: tax rates applicable in your area.