How Property Taxes Factor into Homeownership

When buying a new home for the first time, it is important to know just how property taxes factor into homeownership. These oft-confusing and frustrating taxes can derail homebuyers' plans and impact their budget if not well understood. Thankfully, building a clear understanding of property taxes is as easy as reading this guide. With this helpful information, homebuyers can breeze through the purchase process with their budget and expectations intact. Here's what everyone needs to know.

For informational purposes only. Always consult with a certified tax expert before proceeding with any real estate transaction.

Homeowners Need to Pay Property Taxes Each Year

Tax payments generally become due twice a year in April and October, giving homeowners a chance to break up their payments. Each year, homeowners receive their adjusted property tax statements during the spring season to allow them to update their budget. These statements clearly indicate the property's total tax amount due for that year, based on the local tax rate and updated property value.

The tax statements often come with incentives as well, encouraging homeowners to pay their bill in full and on time. These incentives tend to come in the form of a discount that increases with the amount paid. Homeowners who make a full payment well ahead of the due date may receive a 3% discount, while a half payment may only net 1%. When homeowners wrap their property taxes into their mortgage payments, they are not eligible for any of these discounts.

Property Tax Rates Tend to Vary and Fluctuate

Property tax rates vary considerably across California and the United States. In New Jersey, homeowners can expect to pay 2.16% of their home value in property taxes, while Hawaii residents only pay .29%. Each jurisdiction sets their own tax rates based on the local laws.

The rates can change from year to year as residents vote to raise property taxes to cover public services, such as schools and roads. In some cases, these measures are temporary and fall away after a number of years, decreasing the property tax rate. As a result of these variations and fluctuations, most homeowners leave it to their annual property tax bill to let them know how much they owe year to year.

Home Values Determine the Total Tax Bill

To calculate the tax bill for each property, officials multiply the local tax rate by the value of the home. In New Jersey, the tax bill on a $300,000 property would total $6,480, while a similar property in Hawaii would only have $870 due annually.

As property values fluctuate, so does the yearly tax bill. Property assessors do not always calculate property values yearly, however. In some areas, the assessments only occur once every five years. Furthermore, in rare cases, officials may only perform a value assessment upon change of ownership of the property.

Value Cards Come in the Mail After Each Assessment

When assessors make adjustments to the property value, homeowners receive a card in the mail prior to receiving their tax bill for that year. Homeowners should always verify the accuracy of the value list on the card before paying their tax bill.

If they find the value too high, they can file an appeal with the local tax assessor's office. The appeal window is only open for a few months after the cards are sent out, so it is important for homeowners to quickly file to correct the value. Otherwise, homeowners must wait until the next year to file.

With assessors listing 60% of properties over their actual value, taking this route can really pay off. If the property is overvalued, the correction can greatly reduce the tax bill owed for that year and beyond.

Homeowners Can Choose How to Pay Their Taxes

When buying a Pacific Palisades home with a mortgage, lenders give homeowners the option to wrap their property taxes into their mortgage payments or pay it outright. When they elect to wrap it into the mortgage, a portion of their monthly mortgage payments go into escrow to cover the annual tax bill. When the taxes come due, the lender applies the funds in escrow to the balance due to cover the taxes in full.

Since lenders estimate the total amount of property taxes due each year, it is possible that the funds in escrow will not fully cover the owed amount. If this happens, homeowners must come up with the remaining funds to fully pay their tax bill. When the funds in escrow exceed the tax payment, homeowners will receive a prompt refund from their lender.

Missed Property Tax Payments Can Prove Disastrous

Since each jurisdiction relies on property taxes to fund their public services, they are serious about receiving payments on time. In certain areas, homeowners may face foreclosure and have their homes sold at auction. In other areas, officials may put a tax lien on the property for the total amount due.

If this occurs, the lender may cover the back taxes, and then request payment from the homeowner. The lender has the right to start the foreclosure process after not receiving payment for those back taxes.

By taking all of this into account, homebuyers can make the best purchase decision and ease into homeownership with confidence. Their diligence will pay off in knowing all that will help them navigate this oft-complicated process.

For informational purposes only. Always consult with a certified tax expert before proceeding with any real estate transaction.