Fixed Rate Mortgage Myth

By Justin Long

Whether buying your first family home or purchasing rental property, real estate is a good investment option. However, there is much to consider when budgeting to maintain property. A common assumption is that a fixed rate mortgage will guarantee an exact monthly payment for the entire loan term.  Unfortunately, this is not the case when property taxes and insurance are included in your monthly mortgage payment. Both are fees that will fluctuate throughout the course of your loan term.

Owning a home could be the largest purchase you make in your lifetime. Of course, you would want an asset that valuable insured. But insurance is a business that analyzes risk to assure they are taking in more than they give out. It is likely that during the course of your loan term, there will be periodic increases in your premium.

There are several factors that can contribute to premium increases. Locally, we have seen record breaking floods that have raised premiums and with the expansion of the flood zones, many homeowners may be forced to acquire flood insurance, as an additional policy.

Other factors that can affect your premiums may include, decreasing credit score, adding a home business, aging of the property, adding additions or putting in a swimming pool. It is always a good idea to contact your insurance agent annually to see if any changes have been made to your policy.

As Benjamin Franklin said, “Nothing can be said to be certain, except death and taxes.” We all want good roads to drive on, good schools for our children, parks, libraries, boat launches, policeman, firemen, and teachers. So how do we pay for these amenities and the wages for the community professionals?

Property taxes are the main source of income for all of these necessities and the backbone for city and parish funding.  However, property tax is an ad valorem tax, which means according to value. The amount of property tax you pay is based on the current market value of your land and everything attached thereto. As the real estate market is constantly changing, so can your assessed value, and likewise, your taxes. It may seem unfair that an addition to your home or building a new barn may increase your tax payment, but that’s how the ad valorem tax system has worked for over 200 years.

So, when it comes time to close on that new dream home, you will be quoted an estimate of monthly mortgage payments. This could be done by the lender, real estate agent, closing attorney, title company, etc. Potential homeowners need to ensure that the value used to calculate the property taxes is based on the home’s sale price and not the prior years assessed value. Also, buyers need to ensure homeowners insurance is not based on the previous owner’s premium.

For many real estate transactions, taxes and insurance are miscalculated or overlooked.  This could mean $300-500 in monthly payments that a buyer didn’t include in their budget. The importance of using accurate and honest figures when budgeting for a new home just may prevent your home from being foreclosed on or auctioned at tax sale.