There are two things in this world that are inescapable: death and taxes. Real estate property taxes are no different, and unlike income taxes, aren’t dependent on how much you make or what kind of deductions you have. For a lot of homebuyers, their principal and interest payment looks nothing short of amazing, but once those little extras like homeowners insurance, mortgage insurance and taxes are figured in, that easy payment has turned into something a lot less comfortable. Real estate property taxes account for the bulk of that additional money, so it’s important to know a lot about them before you get a mortgage.
Discovering Your Future Home’s Tax Burden
Real estate taxes are tied to the land, and with that, they’re your responsibility to pay as long as you own your home. You can’t opt out, you can’t delay their payment and you certainly can’t ignore them. It’s hard to estimate the taxes on a home based solely on its price, since tax rates can vary dramatically by town and even neighborhood. You can usually find the most recent rates online through your county assessor’s office, or have your real estate agent get them for you. If you live in an area that’s behind the times, you’ll have to take a trip to your county assessor’s office in order to be sure the numbers are right.
It’s vital to know how much of a tax burden your home carries because that will affect how much you pay each year for the privilege of living in it. In some areas these rates are based on the reported sales price when you close and in others the assessor will come for a private viewing and give your home a value based on the condition that day.
Real Estate Tax Terminology
There are three numbers that matter on your tax statement and any other tax-related statements you get. These are the appraised value, the assessed value and the tax rate. Your statement may call these something slightly different, but they mean the same things.
The appraised value is how much your home is worth, or should be worth, when compared to other, similar homes nearby. This number is pretty accurate in the year you buy your home, since your appraisal is fresh, but over time they tend to drift. Some municipalities make up for this by using a figure based on what it would cost to rebuild your home, minus age-appropriate depreciation.
The assessed value is an internal calculation made by the tax assessor that allows comparison with homes in the same tax rate zone. Sometimes, certain neighborhoods are assessed higher than others because of things like commercial potential or lower because the neighborhood is known to be very undesirable or have few homeowners living in it. The assessed value is the number that comes out when your county assessor puts your home’s appraised value into their formulas – it’s also the number your taxes are directly figured from.
Your tax rate may vary based on your fire district or location inside or outside of a city. As a rule of thumb, the higher tax rates are in areas with the most reliable services, and the lowest tax rates are in areas where basic services, like police and fire suppression, may be in short supply. When you’re looking for an affordable home, you’ll have to strike a balance between lower taxes and better services, but beware: those lower tax areas may be so short of vital services that your homeowners insurance is driven up more than you’ll save by choosing to pay less tax.
Aside from paying for those vital services, property taxes are the primary way that schools and other local government offices are funded. Even if you don’t have kids in schools, you probably still appreciate road crews and sewer and things like that. Without property taxes, you can expect a significantly lower level of service and a higher rate of crime in densely packed areas.
That’s tax basics in a nutshell – a very tiny one. Before you ever make an offer on a home or get a proper estimate on your mortgage costs, you’ll have to know how much tax burden your future home has tied to it – so ask. Ask your agent, ask the county agencies, check the tax averages online, ask the homeowners. If you’re shopping in one particular neighborhood, you’ll soon get a feel for what you’ll be expected to pay to live there.
Escrowing Real Estate Taxes
An overwhelming number of mortgages have an option to place your taxes in escrow and have the lender pay them on your behalf at the end of each year. Those that don’t have an escrow option have a mandate, like most FHA and first time homebuyer programs. The escrow is an account the bank establishes just for you, and that you pay into each month to cover homeowners insurance and your real estate taxes. Many banks get very nervous when you refuse to escrow because they can’t be certain you won’t leave them stuck with a burned-out house with a huge tax lien.
Although the escrows were primarily designed for the bank’s comfort, they help homeowners a great deal, too. Taxes and homeowners insurance payments come but once a year – for many the several thousand dollars that these items amount to are more than they can afford to shell out at once. Sure, you had the best of intentions and started a savings account to cover the costs, but when your car broke down the same week your daughter needed new glasses, you had to rob the fund. With an escrow, that’s never a problem: you pay 1/12 of the price of these things each month and the bank keeps the money safe for you. As a bonus, you also don’t get hit with late fees or threatened with a tax sale of your home if you get a little behind because you can’t.
There are some situations where an escrow might not be in your best interest, though. If, for example, you have uneven income from self-employment or commission work, it may be easier for you to make smaller regular payments and set back larger chunks each time you get paid in order to cover your taxes and homeowners insurance. At one time, investing that money may have been worth the risk of being short on tax day, but in today’s market, the interest you’ll earn in just one year will be miniscule, so escrow if you can.
Challenging Real Estate Property Taxes
If your real estate taxes are too high – and I mean they’re based on an unrealistic value for your home, not that you simply don’t want to pay them – you have the right to challenge your tax appraisal. It’s not an easy task to have your taxes reevaluated, but sometimes it’s necessary, like when property values have dropped significantly or if you’ve purchased a home in a high value neighborhood that needs serious renovations that will take years to complete.
You’ll have to prove that your home isn’t worth what the assessor thinks it is and that’s going to take some research. You can sometimes prove your case with well-researched information from the web, or a statement from your real estate agent, but if you want a sure thing, call a professional home appraiser. For somewhere between $200 and $500, your hired hand will remove any doubt that your home’s value is not what the county believes it to be.
Once the new figures have been accepted and the taxes recalculated, make sure to send a copy of the new tax statement to your bank so they can adjust your escrow accounts. Your bank determines how much escrow your loan requires for a safety pad, but any money you’ve paid in beyond that amount may be refunded to you, your payments may be lowered or both things will happen together.
An appraisal seems like a big investment to save a few hundred dollars, but consider that you’re saving that much money for every year you own your home. When you go to sell your home, having had your home’s assessment reevaluated can help when your taxes are much lower than other houses around you, as well.