Is That Mortgage Payment Really Lower, or Are the Taxes and Insurance Underestimated?
By Mike Baker | The Rate Shop | NMLS #259076
What if the lender with the lowest monthly payment is simply showing you the smallest version of your future bills?
A lower interest rate can be a real advantage. A lower estimate for property taxes or homeowners insurance does not make either bill cheaper.
Before you choose a lender based on the payment, compare the interest rate, lender fees, mortgage insurance, and the tax and insurance amounts behind that number. Otherwise, you may be comparing two very different pictures of the same house.
After 17 years in mortgages, I have seen buyers choose the smaller number, only to find out later that owning the home costs more than they were led to expect.
My goal is to show you REALITY. Not a hope, a wish, or a number that looks good long enough to earn your business.
Is it a better mortgage offer, or just a lower estimate?
When a buyer brings me another lender's quote, we put the offers side by side.
First, are we comparing the same home, loan amount, loan type, term, and rate-lock period? Then we look at four things:
The interest rate and what it costs to get it. A lower rate may come with discount points or higher origination charges. Look at Section A on page 2 of the Loan Estimate, along with any lender credits.
Property taxes. What annual tax bill did each lender use, and where did that figure come from?
Homeowners insurance. Is this an actual quote for the property, or an early placeholder?
Mortgage insurance. If the loan requires it, is it included and calculated for your situation? On a conventional loan with less than 20% down, this deserves a close look.
The CFPB's Loan Estimate guide can help you locate those figures. Check the Projected Payments section on page 1 and whether any taxes, insurance, or assessments must be paid separately.
For the same property and the same insurance coverage, changing lenders does not magically shrink the county's tax bill or the insurer's premium.
If the difference really comes from a better interest rate or lower financing costs, great. But let's make sure that is what we are seeing. My article about mortgage rate matching explains why matching a rate does not always match the whole deal.
How I check property tax and insurance estimates in Kansas City
When someone in my home market of the Kansas City Metro is still narrowing down homes, I need a starting point for the budget.
Two working estimates I use are 1.25% of the purchase price per year for property taxes and 0.7% per year for homeowners insurance. Divide each annual amount by 12 for the monthly estimate.
On a $600,000 home, that would mean:
Property taxes: $600,000 × 1.25%: $7,500 per year, $625 per month.
Homeowners insurance: $600,000 × 0.7%: $4,200 per year, $350 per month.
Those are my starting estimates, not county tax rates or insurance quotes. Some properties will cost more. Once we have an address, I want property-specific numbers.
In Johnson County, Kansas, taxes depend on the property's assessed value and local mill levy. Jackson County, Missouri, likewise explains that the bill depends on assessed value and the applicable taxing entities' rates. A percentage shortcut cannot replace checking the address.
We can pull the current tax record and look at comparable homes. For insurance, ask your agent for quotes on a couple of properties you are considering. If you need an introduction to an agent, I am happy to help.
A newer home may have a lower premium than an older one. Roof condition, coverage, and deductibles matter, too. The Missouri Department of Insurance's homeowners FAQs explain several of those tradeoffs.
If I see a $1,200 annual insurance estimate for a 15-year-old, $600,000 home, I want to know what supports it. Maybe there is a real quote. Show me. An unusually small placeholder is not enough to build a family budget around.
The new-construction trap: a tax bill for a lot is not a tax bill for a house
This is where an attractive payment can turn into a very unpleasant surprise.
A newly built home's current tax record may still reflect the vacant lot rather than the completed house. If the payment is based on that old bill, the estimate can look wonderful.
Then the finished home is assessed, the tax bill rises, and the homeowner discovers the payment never reflected the full cost of the house.
I have known buyers who experienced this. It can create real financial distress.
Here is a simplified example using a full year's tax difference, with other escrow balances and timing left out:
Original land-only annual tax bill: $800.
Estimated completed-home annual tax bill: $7,500.
Difference for that full year: $6,700.
Additional monthly collection for future taxes: About $558.
Monthly repayment if the $6,700 shortfall is spread over 12 months: About $558.
Combined monthly increase during those 12 months: About $1,117.
There are two separate problems. You need enough money for the higher bill going forward, and you need to catch up on the amount already missing.
In this example, the catch-up portion ends after repayment. The higher ongoing tax collection remains while the annual bill is $7,500. Future bills can change again.
Your actual escrow analysis depends on payment timing, balances, and the bills paid. The Office of the Comptroller of the Currency explains how a shortage can raise your payment.
The lower estimate did not save you money. It postponed the moment you found out what the home actually cost.
Ask these questions before buying new construction
You do not need to become a property tax expert. Ask your loan officer:
“Can you show me how you calculated the monthly property taxes?”
“Are you using the current land-only bill or an estimate for the completed home?”
“What value and local tax information did you use for that estimate?”
“How does that compare with similar finished homes nearby?”
The lender and title company should help explain the assumptions. Do not assume that getting to closing guarantees the first tax estimate will match the finished home's future bill.
A small estimate can also hide cash you will need at closing
This is not only about the monthly payment.
Buyers typically pay the first year's homeowners insurance premium upfront. With an escrow account, they also fund an initial reserve for future bills. These are related costs, but they are not the same bucket of money. You can review Prepaids in Section F and Initial Escrow Payment at Closing in Section G on page 2 of the Loan Estimate.
If the insurance estimate was $1,200 and the actual annual premium is $2,500, the first-year premium alone is $1,300 higher. The amount needed to set up escrow may change, too. A tax estimate that is too low can affect that initial funding as well.
Finding this out a week before closing leaves fewer options. You may be able to shop insurance, but compare coverage and deductibles along with the premium. You cannot count on changing a property's tax bill in a few days.
Does a low estimate mean the lender is being dishonest?
A difference deserves an explanation. By itself, it does not prove intent.
An early estimate can need updating. Insurance quotes change. Property information can be incomplete. What matters is whether the loan officer can explain the number and revise it when better information is available.
Ask: “What are you using to estimate my property taxes and insurance?”
If they cannot answer, brush off your concern, or will not show you the assumptions, get a second opinion. You should not have to ignore your gut to keep a mortgage application moving.
A web search or AI answer can help you find county records and questions to ask. For the budget itself, use the actual property information and an insurance agent's quote.
What if the realistic payment is more than you wanted?
Then we look at realistic options.
That might mean a lower price range, a different down payment, or negotiating seller credits toward eligible costs or a buydown. With a temporary buydown, we need to be comfortable with the payment after the temporary help ends.
We go back to the original conversation: What do you feel comfortable paying each month? What do you want left over for saving, family, and enjoying your life?
My guide to how much house you can realistically afford starts with that question. And if you want another set of eyes on an offer, you can send me your Loan Estimate for review.
Quick answers about mortgage payment estimates
Can my payment rise even if I have a fixed interest rate?
Yes. A fixed interest rate does not freeze your property taxes or insurance premiums. Those costs can change the total payment. The CFPB explains the distinction between principal and interest and the full monthly payment.
If I pay an escrow shortage in full, will my payment go back down?
Paying the shortage can remove the catch-up portion, but you still need enough each month for the higher ongoing bills. Ask your servicer how a voluntary lump-sum payment would affect your escrow analysis.
Are taxes and insurance included in every mortgage payment?
No. If you pay them separately, they still belong in your housing budget. A payment that leaves them out is not the full cost of owning the home.
I like surprises at closing. The GOOD kind.
I know being more conservative with my estimates has lost me business.
I would still rather show you a realistic starting point and have the numbers improve than win you over with a small payment that falls apart later.
I want you to have an experience that makes you comfortable referring your friends and family to me. Low numbers upfront do not create that experience if they are not supported by the facts.
If two offers show very different payments, schedule a mortgage consultation. We can put the numbers side by side and talk through what is actually different.
Conversations are free. Finding out the real payment before you buy can be priceless.
