What is a Real Estate Assessment and How Does It Affect Me?

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Published on March 8, 2018

Every town or city assesses homes to determine their value for property tax purposes. Since your new home mortgage will include an escrow account (money set aside each month) to pay things like property taxes and homeowners' insurance, the assessed value of the home you're buying will definitely affect what your monthly mortgage payment will be -- just not necessarily at the outset. That may seem like a strange statement, especially if you're applying for a fixed-rate mortgage, but you'll find that while the mortgage portion of your monthly payment stays the same, your payment may still go up based on the assessed value of your home down the road.

Is an Assessment the Same as an Appraisal?

The short answer to this question is "no". The value that a county assessor places on a home and the property it sits on can be different from the appraised value that the bank or lending institution places on the home. To be clear, both terms are describing a way to place a value on a home or property, but they go about the process in different ways and for different reasons.

How They're Different

An appraiser looks at similar homes in the area that have recently sold, arrives at an average selling price, and then adjusts for things like the number of bedrooms and bathrooms the home being appraised has, as well as updates and location to come up with an appraised value. This is done so that the bank can determine whether the amount you're seeking is in line with what the house is worth.

An assessor goes about the process in a different way. She'll look at sales from recent years to come up with an assessed value, and she'll also look at improvements that have been made. (Perhaps the homeowner has added a deck or has added a bathroom. (Permits for improvements let the municipality know about improvements.) The assessment is strictly for tax purposes. For example, let's assume that the tax rate in your city is $10.00 per $1000 and your home is assessed for $250,000. Your property taxes will be $2,500. But say the next time your home is assessed in three to five years, it's assessed value goes up to $300,000 and your taxes are now $3,000. Your loan payment will also go up since more money will be needed in your escrow account to cover the new, higher property tax.

Other Factors

When you apply for your mortgage loan, the lender will set up the escrow portion of the loan based on the current property tax. Bear in mind that the next assessment may be a year or more away and the taxes may go up because the city or town added a new school or library. Property taxes are also based on schools, infrastructure and public services such as trash collection. As these things change, property taxes will increase to reflect the revenue needed to finance them.

Another consideration is the economy. In general, when the economy is doing well, property values increase, and taxes go up accordingly. When the economy is doing poorly, property taxes may actually go down, and your monthly payment will reflect that as well.

In the end, the higher the assessed value of a property, the higher the property taxes will be, and every time improvements are made, or property values in the area go up, so will taxes, and that -- along with rising home insurance costs -- will cause your monthly loan payment to fluctuate, sometimes on an annual basis.

Your Annual Escrow Statement

At the end of its fiscal year, your lender will provide you with a detailed summary of your loan and will tell you whether the amount of money in your escrow account was enough to cover property taxes and homeowner's insurance. If there was enough money, your payment will stay the same. If there was a shortage, you'll be asked to pay it in a lump sum or have it spread out (amortized) into your monthly payments over the coming year.

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