Taxes-and-Insurance refers to the two recurring, non-mortgage costs tied to property ownership: property taxes and homeowners insurance. Lenders typically collect these amounts as part of a borrower’s monthly mortgage payment and hold them in an escrow account to pay the bills when due.
Definition: Annual taxes levied by local governments based on an assessed property value to fund public services like schools, police, and infrastructure.
How it’s calculated: The tax bill = assessed value × local tax rate (mill rate). Example: a $300,000 home with a 1.2% tax rate has an annual tax bill of $3,600.
Definition: Insurance that protects the dwelling, personal property, and provides liability coverage for injuries on the property. It may cover risks like fire, theft, and some natural disasters depending on the policy.
How premiums are set: Factors include home value, location, coverage limits, deductible, and claims history.
Most lenders bundle taxes and insurance into a homeowner’s monthly payment. The lender places the collected funds in escrow and pays the annual bills on the borrower’s behalf.
Example breakdown: For a $2,000 mortgage payment:
An escrow account is a special account the lender manages to ensure taxes and insurance get paid on time and to help borrowers budget these annual costs. At closing, lenders often require several months’ worth of taxes and insurance to be deposited into escrow.
Responsibility for taxes and insurance varies by lease type. Residential landlords may pay taxes while passing insurance costs to tenants in some arrangements. In commercial real estate—especially triple-net (NNN) leases—tenants commonly pay a proportionate share of property taxes, insurance premiums, and maintenance.
In large or complex transactions (often commercial), buyers may purchase tax insurance to protect against unforeseen tax liabilities or reassessments that could raise property taxes after closing.
Investors can usually deduct property taxes and insurance premiums as operating expenses on tax returns, reducing taxable income and improving cash flow for rental properties.
