Buying a house is a more complicated process than common-knowledge provides for. Most people think about the cost of owning a home to be just the mortgage, but there is something in addition. Property tax is the government required cost of owning a home supported by the local infrastructure. Property taxes pay for schools, roads, parks and public buildings, police, firefighters, emergency services, and safety workers.
However, property taxes also have a serious influence on the cost of owning a home. If you don't know a home's property tax or aren't prepared for the additional cost, property tax can catch you by surprise. Here are the top four reasons why every homeowner and home buyer should know their property tax.
Escrow and Earnest Money
In the home buying process, you'll be asked to put down something called "earnest money" into an escrow account. This assures the buyer that you're serious about the purchase, and that money is lost if you fall through on the purchase. But where does the money in escrow go when you successfully complete the home purchase? It is traditionally put to paying your home's property taxes for the first month or several months.
Your earnest money may be calculated based on local property taxes, in order to cover a specific number of months. By knowing the current property tax rate, you may be able to calculate how much earnest-money you need to have and how far it will go to pay property taxes after your purchase.
Monthly Cost for Owning the House
Buying a home involves calculating your future mortgage payments based on a practical monthly budget. But your property taxes are also a part of that. It is vital that homeowners prepare to add the property tax amount to your expected monthly mortgage payments. Together, they realistically represent your housing spend.
In fact, even when the house is completely paid off or inherited whole-cloth, the property taxes still need to be paid. Because of property taxes, a high-value home can cost more to own than renting a much smaller place.
New Property Tax Assessments
Property tax is based on the home's assessed value. The assessed value is not the same as the appraised value or your final sale price, but it can change. You can roughly calculate property tax based on sale prices, but the government rates a home's property value by different standards than the real estate market. This means property taxes often stay the same from owner to owner, even if the sale price has changed.
Reassessments, however, re-evaluate your property taxes. Home improvements or location values may increase the property value and, thus, the property tax.
Home purchases are a common time for homes to be re-assessed. Many regions will require a home to be reassessed when it changes owners, in order to ensure that the property taxes are accurate and up-to-date. Once your home has been re-assessed, you will receive a new property tax amount based on a percentage of that value. The good news is that assessed value is almost always lower than sale and appraisal values.
Influence of Neighborhoods and Location
The location of each house has a strong influence over the "mill rate". The mill rate is the percentage -of-value that your home is taxed. 4% is a typical mill rate in the US. Each region inside a region may add its own property tax. For example, your home may have state, county, city, or neighborhood property taxes which each contribute to key aspects of the local infrastructure.
Being close to schools, good roads, and high-demand locations come at a cost and that con stack up as you get into neighborhoods, city, and state taxation.
How to Find Your Home's Property Tax
You can become informed about your home or future home's property tax with a few easy investigative steps. First, look up the local property tax mill rate in the state, county, and city. Then find the home's assessed value in the public property records. Or you can consult a real estate professional who is experienced at collecting property tax information for home buyers.