Learning about property taxes will free up time for you to focus on other important factors when you purchase a home.
Buying a house is a significant decision and a substantial financial commitment, but the price tag is only the beginning. What if I told you that the initial cost is only one piece of the financial puzzle, and understanding property taxes is just as important?
Understanding each part of your purchase with your VA loan or any other funding property taxes will have a significant impact. By doing your research, you can navigate the home buying process more informed and confident.
What are Property Taxes?
Property taxes are recurring fees paid by homeowners to their local government. These taxes are primarily used to fund public services like schools, road maintenance, and emergency services.
The amount of property tax you’ll owe is determined by your home’s assessed value and your local tax rate. Your local government sets the tax rate, and a tax assessor determines the value of your property based on factors like size, location, and property improvements.
How Property Taxes Impact Your Home Purchase
Understanding property taxes is crucial because they significantly impact the overall cost of homeownership. Besides the mortgage, they are one of the most substantial ongoing expenses you’ll need to plan for.
Property taxes can also affect your monthly mortgage payment as they are often escrowed, meaning a portion is included in your payment each month.
Moreover, high property taxes can make an otherwise affordable home less so. When budgeting for a new home, you must consider not only the mortgage payment but also the associated property taxes.
How to Estimate Property Taxes Before Buying a House
To estimate your property taxes, start by researching the property tax rates in your prospective area. County or city websites usually publish this information.
Next, calculate an estimated tax amount based on the purchase price of the house and the local tax rate. Keep in mind, this is just an estimate, and the actual tax bill may be higher or lower, depending on the assessed value of your home.
It’s essential to include these estimated property tax costs in your budget planning.
Understanding Your Property Tax Bill
A property tax bill typically includes the assessed value of your home, the tax rate, and the total tax amount due. It’s crucial to understand that the assessed value may differ from the purchase price or market value, as it’s determined by a tax assessor and factors in criteria like home improvements and market conditions.
Property taxes are usually paid semi-annually or annually, depending on your local jurisdiction’s rules.
Tips to Lower Your Property Tax Burden
Believe it or not, there are ways to reduce your property tax burden. You might qualify for exemptions like a homestead exemption, which lowers your home’s taxable value if it’s your primary residence.
Challenging a tax assessment is another option if you believe your home’s assessed value is too high.
Remember, maintaining your property well can positively impact its assessed value and, therefore, your property taxes.
However, it’s wise to consult with a tax professional or real estate attorney to fully understand your potential tax savings and navigate these options.
Understanding an Escrow Account
An escrow account is a financial arrangement established by a lender to hold funds for the payment of certain expenses related to a property, such as property taxes and insurance. It acts as a neutral third-party account managed by the lender or a designated servicing company.
Here’s how an escrow account typically works:
– Setting up the account: When you obtain a mortgage loan, the lender may require you to set up an escrow account as part of the loan agreement. The lender will estimate the amount of property taxes and insurance premiums you will owe during the year.
– Initial deposit: To establish the escrow account, you’ll make an initial deposit that covers a portion of the expected expenses. This amount is usually collected at the loan closing. You should see this amount on your settlement statement from the title company.
– Monthly contributions: Each month, a portion of your mortgage payment is allocated towards the escrow account. The lender calculates this amount by dividing the estimated annual expenses by 12.
– Escrow account management: The lender holds the funds in the escrow account until the respective expenses become due. They are responsible for managing the account, making timely payments on your behalf when the bills are received. With them managing the account you can be assured in most cases that enough is being collected for property taxes and insurance and you will not be hit with a huge bill during the year.
– Payment of property taxes: When the property tax bill is due, the lender uses the funds in the escrow account to pay the bill directly to the tax authority. This ensures that your taxes are paid on time, and the property remains in good standing.
Now, let’s explore why a lender collects property taxes in an escrow account:
- Protecting their investment: Lenders have a vested interest in protecting the property securing the loan. Property taxes are a critical obligation that must be paid to maintain the property’s legal status and prevent tax liens or foreclosures. By collecting property taxes in an escrow account, lenders ensure these expenses are paid, minimizing their risk.
- Ensuring timely payments: Property tax due dates can vary, and failure to pay on time may result in penalties or legal consequences. By managing the escrow account, lenders take the responsibility of paying property taxes promptly, eliminating the risk of late or missed payments.
- Budgeting and accuracy: By estimating and collecting a portion of the property tax amount monthly, lenders can distribute the expense evenly over the year. This approach helps borrowers budget for their property tax payments and avoids the burden of paying a lump sum at the end of the year.
- Simplifying the process: Having an escrow account consolidates the payment of property taxes with your regular mortgage payment. This simplifies financial management for borrowers, as they only need to make a single payment to their lender each month, covering both the mortgage and property tax expenses.
It’s important to note that escrow accounts are not limited to property taxes. They can also be used for other expenses like homeowners insurance, mortgage insurance, or other items specified in the loan agreement. The specifics of escrow account requirements may vary depending on the lender, loan program, and local regulations. Make sure to read your documents carefully so you know exactly what you need to pay the lender you are using.
ADPI Pro Tips
- Ensure to review your statements to ensure that your escrow account is paying your taxes (they are typically due once or twice a year to your county.
- Ensure that you are paying the correct amount if you have a direct deposit set up. In some cases your taxes will go up. Therefore you need to ensure that you adjust your auto payment.
