Navigating Real Estate Taxes for the First-Time Homeowner
By Sam Radbil
When you are buying your first home, your initial question will most likely be, “What is my monthly payment?”
If you’re used to renting in the Bay Area or in another expensive city like Denver where rent prices are constantly on the rise, then you know it’s comforting to have a single payment and letyour landlord worry about the rest.
Although it might seem daunting to learn about owning a home and the monthly payments that come along with it, but it’s fairly easy to find outwhat your loan payment will be. That said,beware, because that is not necessarily your total monthly payment amount.
Your loan consists of principal and interest, and if you go online to bankrate.com, you can find many mortgage calculators that will define your exact payment. Property taxes are another story, however, and you need to understand who receives these, how they receive them, and how you are credited properly.
What Are Property Taxes?
“A property tax (yes, these can be very high) is an ad valorem tax on the value of a property, usually levied on real estate. The tax is levied by the governing authority of the jurisdiction in which the property is located. This can be a national government, a federated state, a county or geographical region or a municipality. Multiple jurisdictions may tax the same property.”
Confused? It’s actually pretty simple. The governing authorities of your county and city will place a value on your home. This is called the assessment. Then, they will calculate a percentage of that assessment that they will tax. For example, if your home is assessed at $100,000, and the local governing units’ tax rate is 2.0 percent, your property taxes will be $2000 per year.
Different municipalities includecharges for varied items like schools, even road improvements and other services in the tax they charge you. The more your home is worth, the more you’ll pay in property taxes.
Your home may not be taxed on its full assessment, however, as some governmental agencies will assess high and then tax at a certain percentage rate, like80 percent. In this situation, a home assessed at $100,000 will only be taxed on $80,000. Municipalities do this to give themselves room. Rather than do a reassessment--something that annoys taxpayers--they only have raise the percentage they tax upon to create more tax dollars.
Most lenders will want to be in control of property tax payments, because if property taxes are not paid timely, the governmental agencies can ultimately foreclose upon a delinquent property. Therefore, lenders will require that you include one-twelfth of your yearly property taxes worth each monthly
payment you make. If your taxes are $2400 per year, you will need to add $200 per month to your payment. If your taxes go up, the lender will raise your payment.
Where Your Money Lives
The lender won’t pay your taxes until they are due, so they get to deposit them in what is called an escrow account. And guess what Investopedia tells us:
“A bank is not required to pay interest on any escrow accounts (also mortgage impound accounts) it holds for its customers. There are some exceptions of course, but the U.S. Department of Housing and Urban Development (HUD) does not require interest to be paid.”
Yep, the lender gets to keepyour money for a year and not pay you interest!
Remember, whether you’re a first-time owner overcoming mortgage rejection; or you can easily afford your new home, you need to ask your Realtor about the property tax rates in your area, as these can vary widely by suburb, town, city and county. And one more thing--property insurance works the same way. Your lender will include enough money in your monthly payment to cover homeowners’ insurance also. If you are unsure about any of this, ask everyone—the lender, your Realtor, and the title company, as the time to ask any questionsis before you close the deal!