If you’re a first-time homebuyer, you’ve likely been saving money for your upcoming mortgage payments. While most of that money goes toward repaying your lender, typically a portion of it goes toward something else entirely — property taxes.
But what is this tax for? How is it determined? And how often does it need to be paid? Here are the property tax basics you should know so you can go into the homebuying process with confidence.
What Are Property Taxes?
An important aspect of homeownership, property taxes are based on the value of your home and are considered an “ad valorem” tax. This tax is paid to your local government and helps fund public services in your area like schools, fire departments, public safety or other special infrastructure. As a homeowner, you’ll pay this tax to contribute to your community’s well-being and ensure essential services are provided.
How Property Taxes Are Determined
There isn’t a flat rate for property taxes, as they are based on an individual home’s value. Local authorities will put your home through an assessment every few years (called an appraisal) to determine its value.
This value doesn’t just come from the price you paid to buy your home. Other factors include the value of the land your home is on, improvements you may have made to your home and recent sales of similar properties in the area.
It is important to note that the appraisal value of your home for property tax purposes is not the same as the appraisal value of your home for resale purposes. Further, your local government will likely not calculate your property tax on the full appraisal value of your home. Instead, your property tax will only be calculated on a smaller percentage of the appraisal value of your home, called the assessed value, which could be 40% of the appraisal value, for example.
Calculating Property Taxes
Once your local government knows how much money it needs to run its services, a millage rate is set. This rate is expressed in a measurement known as mills. A mill is equal to $1 of tax for every $1,000 of assessed value.
The final step to figuring out your property taxes is to multiply the assessed value of your home by the millage rate. For example, if your home’s assessed value is $80,000 and the tax rate is 20 mills (or 0.020 as a decimal), your annual property tax would be $1,600.
Escrow Accounts
A common way to pay your property taxes is through an escrow account. Essentially, your mortgage lender will collect a portion of your annual property tax with each monthly mortgage payment. Then, they’ll handle your property tax for you when it’s due. This helps ensure your property tax payments are paid on time and makes them easier to budget for by breaking them up across the year. Please contact your mortgage lender for more details on using escrow for your property taxes.
Paying Independently
If paying through escrow isn’t available or your lender does not require it, you’ll have to pay your property taxes on your own. Most of the time, property taxes are billed annually but the due date can vary by location. Some areas allow semi-annual or even quarterly payments. Make sure you’re aware of your local tax payment schedule to avoid late fees or penalties.
Ready to start your journey toward homeownership? Contact one of our Home Guides and schedule an appointment today.
