Property taxes and homeowners insurance are the "TI" in the PITI breakdown from lesson 1 — the two costs that ride inside your monthly payment without showing up as their own bill. Because they pass through escrow, most owners never look at how they are calculated, and they are also the two costs most likely to rise. Understanding them is how a payment increase stops being a mystery.
How property taxes are assessed
A property tax is a yearly charge from your local government, based on the value of your home, that funds schools, roads, police, fire and libraries. The bill is two pieces multiplied together: the assessed value (the government's official estimate of what the home is worth) and the tax rate, often called millage, set by local taxing bodies.
| Piece | What it is | Who sets it |
|---|---|---|
| Assessed value | The official estimate of your home's value | A county or city assessor |
| Tax rate (millage) | The percentage applied to assessed value | Local taxing authorities |
| Annual tax bill | Assessed value × tax rate | The two together |
Property taxes rise for two reasons that stack. Assessed values climb as home prices in the area rise — your assessment is updated every year or every few years — and tax rates can be raised when a school district or municipality needs more revenue. Either pushes the bill up; both together push it up fast, and this is the most common reason an escrow payment jumps from one year to the next.
Exemptions and appeals
Two levers can lower the bill.
A homestead exemption reduces the taxable value of the home you live in, knocking a set amount or percentage off the assessed value before the rate is applied. Most states offer a version, often with extra reductions for older owners, veterans and people with disabilities. It is usually not automatic — it takes a one-time application through your county assessor — so check whether your home is enrolled.
The second lever is an appeal. If an assessment values your home well above what comparable homes nearby sold for, you can usually challenge it: gather recent sales of similar homes, check the assessor's record for errors (wrong square footage, an extra bathroom), and file by the deadline. An inflated assessment repeats every year, so a correction keeps paying.
What homeowners insurance covers — and what it does not
Homeowners insurance is the other half of "TI." A standard policy is a bundle of protections, and its gaps are where owners get the nastiest surprises. The most important fact: most homeowners insurance does not cover flood damage, and earthquake damage is excluded too; both need separate policies.
| Situation | Covered by a standard policy? |
|---|---|
| Fire and smoke damage | Yes |
| Wind, hail and most storms | Yes |
| Theft and vandalism | Yes |
| A visitor injured on your property (liability) | Yes |
| Burst pipe and sudden water damage | Usually yes |
| Flood from rising water | No — separate flood insurance (National Flood Insurance Program or a private insurer) |
| Earthquake damage | No — separate earthquake coverage |
| Normal wear, neglect or lack of maintenance | No |
Read the "no" column twice: only flood insurance pays to rebuild after a flood. Insurance also never covers ordinary wear, which is why the maintenance fund from the previous lesson exists: insurance is for sudden disasters, not for the roof getting old. Deductibles, liability limits and umbrella policies are covered in auto, renters and home insurance.
Replacement cost vs market value
How much coverage do you need? Not what you paid or what the house would sell for. Insurance is built around replacement cost — what it takes to rebuild the structure — and that is a different number from market value.
Market value includes the land, the neighborhood and what a buyer would pay; replacement cost is the cost to rebuild the structure at current labor and material prices. In an expensive city, market value sits far above replacement cost because the land is what costs money; after a spike in construction costs, replacement cost climbs while market value is flat. Insuring to the wrong number — usually too little — is how owners discover a gap after a loss.
Knowing how taxes and insurance move makes a payment increase explainable instead of alarming. The final lesson pulls them, with maintenance, into one system you can run.