Home buying is one of those things that has endless numbers of considerations; I can tell you from personal experience.
When looking for a home, if you’re like me, it’s likely that you’ll set a budget based on what you can afford for a monthly payment.
But I’ve found that one little detail people tend to overlook when setting their monthly housing budget is the property taxes.
Property taxes can be extremely high in some areas, so it’s important to take that into consideration when buying a home. Not only can property taxes be high but they can trend towards increasing often and by large amounts. This can increase your monthly mortgage payment if you decide to escrow your property taxes.
I want to share a few helpful tips that can help you understand how property taxes can affect your homeownership journey. So here’s what you should know when analyzing the cost of property taxes.
Property taxes affect the total cost of homeownership
The total cost of homeownership can be affected by many factors aside from the regular suspects like principal, interest, and private mortgage insurance (PMI.) Principal and interest are set in a conventional loan, so these dollar amounts will not change over the life of your mortgage loan. However, what can change are factors like maintenance, upkeep, and, of course, property taxes.
Depending on the area where you choose to live, you could be facing extremely high property taxes relative to the value of your home and nearby surrounding areas.
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Don’t forget to give your banker the exact property information so that property taxes can be accurately reflected in your loan estimate.
By law, your lender is required to give you a loan estimate three days after applying for a mortgage. So you should know pretty early on how property taxes will affect not only your monthly mortgage note but also your total cost of homeownership over the life of the loan.
Property taxes can change
Even with a loan estimate from your lender, there is no guarantee that the property tax amount will stay the same over the lifetime of the loan. You’ll get a figure that includes your property tax estimates (which are usually backward-looking) but the general trend is that property taxes increase.
Sorry to burst your bubble if you thought otherwise.
Property tax increases can happen for a number of reasons including a change in county administration. For instance, there can be pro-tax public officials that have a penchant for increasing property taxes. Even at the municipal level, there can be referendums to increase property taxes to raise revenues for schools or other local government needs.
When you are looking for homes, pay attention to where they are located and check the history of property taxes for that area, and you’ll want to ask these questions:
- Have there been multiple referendums that result in additional property tax hikes?
- Has there been statewide legislation that increases property taxes?
Basically, you looking for trends that give you an idea of whether or not property taxes could be increased in your area and by how much.
The tax rate you see may not be the tax rate you get
If you’re looking for homes with a real estate agent, one of the first things they’ll give you is a property datasheet. This sheet can include information like the square footage of the property and the dimensions of the lot it sits on.
It will reveal the type of structure, the school district associated with the property location, and so on. You’ll also see information about property taxes.
Just because you see a certain property tax rate doesn’t mean that it’ll be your effective tax rate as the owner of the property. Many counties have discounts and exemptions that apply to certain categories of people like seniors and owner-occupants. If you are not eligible for these exemptions yet, they may already be applied in the tax rate you see for the home you are considering, so you may inadvertently underestimate your monthly payment for the home.
Make sure you get a clear understanding from the realtor about any exemptions, discounts, or otherwise special programs that the current homeowner has that may or may not apply to you.
It would be heartbreaking to go through the process of finding a home that you really like, only to find out that it’s unaffordable because of miscalculated property tax rates.
See if you qualify for certain discounts and exemptions
On the flip side, you may actually find out that the property taxes on a home you are considering are higher than what you’d need to pay. As the new homeowner, you may qualify for a discounted property tax rate.
You can usually go down to your county courthouse or give them a call to find out what the different discounts and exemptions offered to different categories of homeowners are.
If the county authorities confirm that your effective property tax rate can be lowered, your home purchase may be more affordable than you initially thought. This is good news.
Even so, you’ll have to be extra diligent to ensure that the information that you’re receiving is accurate. Get everything in writing and follow up to make sure your discounts are applied as soon as possible.
Even if you are not eligible for discounts and exemptions there are still some other steps that you can take to lower your property taxes on a home that you’d really like to live in.
Property taxes can be appealed and reassessed
As much as 30-60% of property in the United States is actually over-assessed. This means that millions of homeowners are actually paying too much for their property taxes.
Though you should not base your home-buying decision on the possibility of getting your property tax rate reduced through an appeal, you should know that it’s an option. The best thing to do would be to consult with a real estate or property tax attorney who can give you realistic expectations around the property tax appeals process.
Even if your appeal is not approved many counties have something like a board of review or similar body where you can essentially “appeal the appeal.” This independent review process may come back with a determination that your property is, indeed, over-assessed and should have a lower tax rate applied to your bill.
Personally, I’ve appealed property taxes for both myself and my relatives with successful results. It’s definitely something you should not be scared of doing if you think you’re paying way too much.
Buying a home is a lot to keep track of but also amazing and exciting! And finding a property that is well within your budget can make the process even more exciting.
However, you want to make sure that your home is truly affordable based on all the factors that will make up your monthly mortgage amount. Paying attention to property taxes when you buy a home will affect that amount, so make sure that you understand exactly what you’ll pay on your new home’s property taxes.