Prospective buyers need to know all the expenses they must pay regularly to understand the responsibilities of homeownership. A home is the biggest expense of a person’s life, but the long-standing American dream of homeownership continues today, despite higher prices and mortgage rates.
This article will provide a comprehensive guide to what are property taxes, their use by local government, how to calculate the amount you will pay, how to pay them and what happens if you don’t pay them.
When mortgage lenders quote a prospective homeowner a monthly payment known as P&I, that refers to the principal and interest paid on the loan. But anyone who owns a home must also pay property taxes. Mortgage borrowers are also required to have insurance, which protects the lender from calamities like fire, flooding or other destruction of the property. Someone who pays cash or inherits a home without a mortgage is not required to have insurance, but it is advisable to have it.
So, if a lender quotes you the PITI of a home, that means the principal, interest, taxes and insurance are bundled into one total monthly payment. You can use a mortgage calculator before meeting with a lender to get a general idea of what the PITI will be for different home prices or you can get an estimate based on a $300,000 home.
Understanding Property Tax
Property tax is an annual or semiannual charge levied on homeowners by local governments and paid by real estate owners within that location. Property tax is a part of owning a home. The money you pay in property taxes goes to the local government for projects and services such as roads, schools, police and fire departments.
How Does Property Tax Work?
To understand how property taxes work, you need to know that they are ad valorem, meaning “according to value.” They’re based on the assessed value of the property being taxed – in this case, real estate.
Property tax rates vary by state. New Jersey, Illinois and Connecticut have the highest property tax rates, while Hawaii, Alabama, Nevada, Arizona and Colorado have the lowest rates.
How To Calculate Property Tax
Prospective homeowners often want to know how property taxes are calculated. Local governments set a county tax rate or mill rate. The mill rate is the percentage at which you’re taxed. One mill equals $0.001 or to simplify, the tax is $1 for every $1,000 of your property’s assessed value. To calculate your property tax, multiply the property’s assessed value by the mill rate. If there are any voter-approved levies or assessments, these will be added to the property tax amount.
Every one to five years, the county tax assessor assigns a dollar amount for property values in that county. The assessment rate is a percentage of the market value.
Example: If the assessed value of your primary residence is $300,000 and your mill rate is 12, since there are 300 $1,000s in your assessed value, you would be taxed $300 x 12 or $3,600 for the year.
A “Homestead exemption” is a statewide discount in which a portion of the home’s assessed value is protected from taxation, thus reducing the taxable value of a primary residence.
Additionally, certain persons may qualify for further exemptions. Senior citizens over 65 with income restrictions or residency requirements, Veterans and persons with disabilities often qualify for these exemptions. In some states, such as Iowa and Florida, a disabled Veteran may receive up to a 100% property tax exemption.
Contact your local county tax office to see if you qualify for a real estate tax exemption.
Property Tax vs. Real Estate Tax
Property and real estate taxes are often used interchangeably but have different meanings. When people ask, “What are personal property taxes?” they may be referring to something other than their home. The personal property tax definition is a tax on personal items such as cars, boats, equipment and furniture. Real estate taxes are the taxes paid on the assessed value of your home and are charged by the local government.
Where the Property Tax Goes
Many people feel they pay too much in taxes but don’t always understand where their property tax goes and how important it is for the community to function properly. Property taxes fund public service projects such as water and sewer improvements, garbage collection, first responder (police and firefighter) services, schools, parks, road infrastructure and libraries. Can you imagine what would happen if everyone stopped paying their real estate taxes? Our property taxes fund these vital services and society would not function well without them.
How To Pay Your Property Tax
There are two ways to pay your property taxes. If you have a mortgage, the mortgage company holds part of your monthly PITI payment in escrow and automatically pays your property taxes in the month they’re due. Even if you miss a mortgage payment or two, the lender will still pay your property taxes to avoid a tax lien.
If you don’t have a mortgage, you would pay your property taxes directly to your local tax office. For a list of state tax offices, click here.
Prospective homeowners often ask their lender or Realtor, “When do you pay property taxes?” The answer is that it varies from state to state and can be anywhere between April to December. The tax bill will usually be sent to the homeowner about 1-2 months before the tax is due. You may also receive a tax estimate before sending the official tax bill. If you wish to dispute the amount of taxes you owe, the tax assessor’s office usually has a website or phone contact where you can state your case.
Another frequently asked question is, “What happens if you don’t pay your property taxes?” Unfortunately, the answer is that your unpaid amount becomes a lien against the property. The property becomes collateral for the debt owed and you could lose your home to a tax sale. In some states, such as Florida, the tax collector will sell your lien in a tax lien sale. At that point, you can pay off the lien, but if you don’t, the collector can sell your property in a tax deed sale. You can still pay off the taxes owed, but you will also have interest and other costs or charges to pay.
Some companies can provide you with property tax loans, but while this will prevent your home from going into foreclosure, the interest on such loans can range from 12% to 18%. Therefore, if you don’t have a mortgage company escrowing tax money for you, the best idea is to budget for the property taxes you know will be coming due.
Making mortgage and tax payments on time is especially important for improving one’s credit score. So, you can see how important paying one’s property taxes is for local communities across the United States and for your benefit.