Property Taxes and the Home Buying Process

Buying a Home: Understanding Property TaxesPeople getting ready to buy a home may already be aware that they will have to pay property taxes after they buy a home. In many regions of the country, property taxes provide a lot of the financial monies that cities, counties, and states need to function. Local governments rely on property taxes to pay for improvements that benefit the population.

Since property taxes are so uniquely regional, the price homeowners might pay differs widely across the country. Despite property taxes being different from state to state and region to region, there are some similarities.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.

How Are Property Taxes Calculated?

The rate that homeowners have to pay depends on the state, but also on the local area. Trying to compare property tax rates from one region to the next would require complicated research. Generally, however, property taxes are calculated based on a set percentage of the home's assessed value. But there is no one accepted national definition of an assessed value. One state may make an assessed value close to the actual fair market value of the home. Others may set it much lower than the home's fair market price.

As a result, buyers may prefer to look at the effective tax rate of the area to get a sense for what to expect. Homeowners have to make a yearly payment that could range from about 1-3 percent of the home's current value. The percentage rate relates to the local standards, and is unlikely to change drastically from one year to the next.

When Do People Pay Property Taxes?

As a general rule, homeowners that have a mortgage pay their property taxes as a part of the mortgage payment through an escrow account. People who own their Millington homes free and clear have to make their own arrangements to pay the bill, which is due once a year at a set time. However, some taxing entities allow for semi or quarterly payments.

When a property tax escrow account is used, the lender will often use an escrow account and place the monthly amount into the account until it can be paid in full. When the property tax bill changes, the amount due in the monthly payment may go up or down. In addition to property taxes, the lender may also require that homeowners insurance and PMI also be included within the monthly escrow mortgage payment. If the escrow account collects too much, the manager of the account could issue a refund to the homeowner.

What Happens If Homeowners Do Not Pay Property Taxes?

Since property taxes are such an important part of funding for civic infrastructure, the region has a vested interest in making sure that they are paid. Just like any other unpaid aspect of homeownership, not paying property taxes could lead the county or other taxing authority to place a lien on the property. Liens are a claim on the property that must be settled before it can be sold. Property tax liens outrank mortgages in priority. In the event of a home sale, this means that property taxes have to be paid before the mortgage. To prevent this from happening, many lenders require borrowers to pay property taxes monthly, in advance through the use of an escrow account (as described above)..

How Do Property Taxes Relate to Home Buying Power?

Property taxes usually break down into a monthly obligation that becomes part of the mortgage payment. When people apply for a mortgage, they are limited by the amount of their income that can be taken by the monthly mortgage payment. This limit typically ranges from 28-33 percent of applicants' gross income, depending on the loan. As such, the property taxes could seriously affect the kinds of homes that buyers can afford. Property taxes of $200 per month will take up less of that maximum compared to property taxes that cost $500 or more per month. Buyers should carefully compare the average property taxes in their preferred neighborhoods in relation to their income, to be sure that the property taxes will allow them to buy in the area.

Are Property Taxes Deductible from Income Taxes?

To a certain degree, homeowners may be able to deduct property taxes from their income tax returns. Property taxes are tied in with other itemized deductions, like the mortgage interest deduction. The cap on property tax deductions is now set at $10,000, but people must itemize to get that deduction. With changes to the tax law applied to 2018 and beyond, people may need to re-evaluate their tax plans. Itemizing deductions could make the most sense for people who have more in relevant deductions than the standard deduction, which was increased to $24,000 for a married couple filing jointly.

Paying property taxes is an important part of homeownership and the mortgage payment. By looking at their property tax obligations before they buy a home, people can have more information to make financial plans for the future.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.

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