Understanding your monthly mortgage payments is crucial for home buyers. When you take a loan, and want to buy a property, your monthly payment is a blend of few components which we call PITI.
PITI is nothing else but a shortcut of Principal, Interest, Tax and Insurance. So, with one monthly payment, you will contribute toward the principal of your loan, interest on your loan, property tax and property insurance. Bank who gave you the loan will make a property tax payment and Insurance payment on your behalf. Every month that you make your mortgage payment, bank will put some money into the escrow account. When there is time to pay for your TI (from PITI) aka insurance or property tax – you won’t have to make these payments – bank will do it for you.
We have little control over the principal and interest, however we do have control over the insurance and tax (well not exactly the property tax). With property insurance - you can search for an insurance company that can get you a better rate. Maybe bundling up with your car insurance can save you some money. Or maybe you can save some money by switching to ….. You get the idea. We can’t do the same with property tax, as this number is not up to us. Property tax is assessed every 3 years by State Department of Assessments and Taxation (STAD). So, we can’t change the tax. Why is it important for a buyer? Well because every property has it, but it can be much higher if the property is located within city limits than for similar property listed just outside of city limits. And since property tax is part of your monthly payment – it can make an enormous difference on your payments. Property tax on a house just outside of city limits may be about $3600 a year (which means that every month you will pay $300 towards property taxes) Very similar property being listed within the city limits may have a property tax of $5000 or more – which would equal to $416 or more. So, picking up a property within the city – we need to pay city and county property tax – and that makes the difference in the tax amount. And if you think that buying a property outside of city limits means that you need to buy a place in a rural area – you can be wrong. Sometimes it is a matter of crossing a street or even a backyard line (e.g. single-family homes where on one side of Rocky Springs Rd. in Frederick we have a development of single family homes in Whittier community (city) and on the other side of the road we have single family homes outside of city limits (to the point that city and non-city property backyard fences touching each other). Sometimes it is a subdivision that is simply not within the city limits and people are not aware of this (e.g. Ballenger Creek in Frederick, MD).
Of course, there are benefits of being within the city, no question about it, and I am not here to tell you where you should buy a house – this is not my role in the process. However, if you are on the strict monthly budget when shopping for a property– perhaps looking for lower taxed properties might be a factor. I must tell you from my experience though – that lots of my past clients wanted to avoid city taxes and they fell in love with a house that was within the limits of city. Once you find the right place, you know it is the right place.