# Property Taxes and Your Mortgage: What You Need to Know

I love taxes! Said no one ever.

Paying taxes is like taking a trip to the dentist–it’s a part of life, but we don’t have to be happy about it. Property taxes are no exception.

Seasoned homeowners know property taxes are part of the homeownership experience. But it’s easy for new buyers to overlook the impact property taxes will have on their bottom line.

Let’s cut through some of the confusion about property taxes so you don’t make a mistake that could cost you hundreds–if not thousands–of dollars each year!

## What are property taxes?

Local governments raise money through property taxes to provide important public services in the community. When your local government (finally) sends someone to fix that pothole wreaking havoc on cars in your neighborhood, it could be your property tax dollars at work! A good chunk of the money collected from property taxes goes to your local police and fire departments, the schools your kids attend and maintenance for the roads you drive on.

## Do I really need to pay property taxes?

Everyone who owns property has to pay property taxes. Makes sense, right? If you’re a homeowner, that includes you! Even if you own other types of properties (like farmland you inherited from your parents or a rental property), you’ll pay property taxes on those too.

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But if you’re renting an apartment or something like an office space, you don’t have to worry about property taxes. That’s on your landlord!

## How do I calculate what I owe in property tax?

The amount you pay in property tax is based on two things: your local government’s tax rate and your property’s assessed value. All you have to do is take your home’s assessed value and multiply it by the tax rate.

ASSESSED VALUE  x  PROPERTY TAX RATE =
PROPERTY TAX

Let’s say your home has an assessed value of \$100,000. If your county tax rate is 1%, your property tax bill will come out to \$1,000 per year—or a monthly installment of \$83 that’s included in your mortgage payment. But we’ll get into that later.

### Assessed Value

Here’s a common mistake a lot of folks make: The assessed value is not the same as the price you paid for the house or how much you can sell it for, which is called the “appraised” or “market” value. Your local government’s tax or property assessor sets the assessed value for your house, and it’s usually lower than the market value. That’s actually a good thing—because the amount you pay in property tax is based on that lower value!

Have no idea what the assessed value of your home is? Dig up your most recent tax bill or do a quick search of properties on the website of your city or county tax assessor.

### Property Tax Rate

Since local governments set property tax rates, the amount you pay depends on where you live. For example, the property tax rate for a condo in the heart of New York City won’t be the same as the rate for a house just a few hours upstate in the suburbs of Syracuse.

To give you a general idea, homeowners in 2017 paid an average of \$3,399 in property taxes at an average tax rate of 1.17%. Those in New Jersey (2.28%), Illinois (2.22%) and Vermont (2.19%) had the highest average property tax rates in the nation while homeowners in Hawaii (0.34%), Alabama (0.49%) and Colorado (0.51%) enjoyed the lowest rates.(1)

It’s also important to remember that property taxes aren’t etched in stone. Tax hikes and property reassessments can change how much you owe from time to time, so make sure you stay up to date to prevent being blindsided by a higher tax bill!

## How much is too much when it comes to property taxes?

When you’re on the hunt for a new home, you’re probably thinking more about how big the backyard is than how much you’ll have to pay in property taxes. We get it, property taxes aren’t fun to think about. Still, if you forget to factor them in, that backyard might not look so great when your first mortgage payment is due!

When it comes to buying a house, Dave recommends that your monthly mortgage payment–including property taxes–should be no more than 25% of your take-home pay. In other words, if those property taxes push your monthly payment above 25%, you need to look elsewhere!

Let’s say Jim and Pam are looking to buy a home that fits within their budget. For them, that means a maximum monthly payment of \$1,500. They’re looking at two houses in neighboring towns. Both houses cost \$200,000 and have an assessed value of \$160,000.

The only difference between the houses is the property tax rate in one town is 1% while the rate in the other is 2%. You might be thinking, 1% isn’t that big of a deal. Oh, but it is!

If Jim and Pam moved to the town with the higher property tax rate, that 1% difference means they’d pay twice as much in property taxes. That would be an extra \$1,600 they’d need to pay each year. You can probably think of some things you could do with that kind of money!

Their monthly mortgage payment in the town with the lower tax rate would be \$1,407. In the town with the 2% tax rate, their monthly payment rises to \$1,541. That would put them over their budget.

See how property taxes can become a budget buster? Working with a top-notch real estate professional who knows the local tax rates in your area can guide you toward a home that actually fits within your budget!

House "A" House "B"
Price (Appraised Value) \$200,000 \$200,000
Assessed Value \$160,000 \$160,000
Tax Rate 1% 2%
Annual Property Tax Total \$1,600 \$3,200
Monthly Property Tax \$133 \$266
Total Monthly Payment \$1,407 \$1,541

## How do I pay my property taxes?

Do you make your monthly mortgage payments on time? Then you’re probably paying your property taxes already! The typical mortgage payment includes principal, interest, homeowner’s insurance and property taxes.

Let’s go back to Jim and Pam. After thinking carefully, they choose the home in the town with the lower tax rate and their mortgage lender estimates they’ll owe \$1,600 in property taxes each year.

And instead of getting smacked with a huge tax bill at the end of the year (triggering a mini panic attack), their lender will divide their total property tax amount by 12 months so they pay an additional \$133 as part of their monthly mortgage payment.

The lender sets that money aside in a separate account (often called an escrow account) and uses it to pay Jim and Pam’s property taxes to the local government when they’re due.

Remember, these are estimates of what you owe in property tax, so you might get a refund or you might have to pay a little extra if the amount comes up short. Be prepared for either scenario!

## Do I still have to pay property taxes after I pay off my house?

There’s nothing more freeing than making your final mortgage payment, walking out to the backyard of your completely paid-off home and feeling the grass beneath your feet.

It just feels different. No more monthly house payments for you! But does that mean you’re also finished with property taxes?

We hate to be the bearer of bad news, but you still have to pay property taxes on your house even after it’s paid for. Sorry! But from then on, you won’t pay those taxes to a mortgage lender. Now it’s on you to pay property taxes directly to your local government.

If you fall behind on paying your property taxes or you don’t pay them at all, you could lose your home even if it’s completely paid for. The local government could sell your house to recoup the tax debt you owe them. Don’t let it come to that!

The best way to handle property taxes on your own is to plan ahead. Calculate what you’ll owe in property tax each year, divide it into monthly payments and set that money aside each month. That way, you won’t have to dig under the sofa cushions to scrape up the money to pay those taxes when they’re due.

Trying to understand how much you owe in property tax can be tricky, especially since the numbers are different in every county. The good news is you don’t have to figure it out on your own!

Our friends at Churchill Mortgage can give you a clear picture of how property taxes affect your monthly mortgage payments. Not only that, but they can also help you get a mortgage that will put you on the path to debt-free homeownership.

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## Buy a House With an Agent Who Serves, Not Sells.

You need an agent who cares more about you than their commission check.

## Buy a House With an Agent Who Serves, Not Sells.

You need an agent who cares more about you than their commission check.