When buying a new home, most people are laser-focused on the mortgage payments, the interest rates and the terms of the loan. Everybody focuses on income, but a much more critical part involves property taxes, which often go unnoticed. These taxes have a direct connection to your mortgage and can affect how much you pay for housing expenses overall. Knowing how your mortgage relates to property taxes can help you better manage your finances and avoid surprises later.
At Applied Accountancy, we provide insights and services to help you navigate these financial intricacies with ease.
What Are Property Taxes?
Property Tax property tax is a tax levied on real estate by local governments (state, county, or city) based on the value of the real estate. Those taxes help pay for local services like schools, public safety, infrastructure, and others. Although property taxes are calculated annually, they are paid in installments (often as part of your monthly mortgage payment).
Mortgage Property taxes and their impact on your mortgage
Escrow accounts: Most mortgage lenders create an escrow account for homeowners to pay their property taxes. Homeowners pay into this account with their monthly mortgage payment, as opposed to paying property taxes directly. When the property taxes are due, the lender pays the taxes on your behalf.
How this affects monthly payments: Property tax can add a sizeable amount to your mortgage payment. If you use a fixed-rate mortgage, the principal and interest on the mortgage loan itself will not change, but property tax rates (which are based on the assessed value of your property) can go up or down depending on local tax policy.
New Laws or Changes in Property Tax Rates: Property tax rates may fluctuate. When local governments raise the tax rate, they come around and raise your mortgage payment, to cover the increased taxes. That’s why the best defense is a periodic review of your property’s tax assessment and any changes in the tax rates.
How to Calculate Your Property Taxes
Keep in mind that property taxes are based on your home value. Here’s a rule of thumb to help you calculate your annual property taxes:
Hence, Property Tax = Property Value x Tax Rate
Divide your annual property tax bill by 12 to find what you’ll contribute each month.
Mortgage Refinancing and Property Taxes
Your property taxes could also be affected by refinancing your mortgage. The refinance itself does not impact the tax rates directly, though your loan terms may change, which can affect your property taxes. If you’re refinancing a property, for example, and your tax bill is different, you may have to modify the amount you put into your escrow account.
What to Do If You Don’t Have Money for Property Taxes
When you don’t pay property taxes, the consequences can be severe — even worse than falling behind on a mortgage payment. If you neglect to pay your property taxes, the local government has the right to put a lien on your property, and in severe situations, the local government can start a foreclosure procedure to recover the taxes owed to them. Your mortgage lender might step in and pay your property taxes to avoid this, but that amount would be added to your unpaid loan balance.
Managing Property Taxes
Property Tax Assessment: If your property has been overvalued, you can appeal the tax assessment. This process differs depending on where you live, but you can typically submit evidence that affects the home’s market value or improvements that might decrease the tax burden.
Plan for increases: Property taxes can surprising skyrocket. You want to-budget for potential increases, particularly when your area’s home values are always changing. You can avoid that cash crunch by saving money or adjusting your escrow contributions when property taxes rise.
Learn About Local Tax Incentives: Some areas provide property tax exemptions or incentives to individuals who meet specific criteria, like seniors, veterans, or low-income families. Look into local programs to cash in on available tax breaks that may apply to you.
Conclusion
The connection between mortgages and property taxes is integral to managing your overall housing expenses. Understanding how escrow accounts work, keeping track of property tax assessments, and leveraging local tax incentives can help reduce financial strain and keep your payments predictable. For expert guidance in property tax management, trust Applied Accountancy to align your financial plans with current tax regulations.
Explore how our team can assist you in making informed decisions about your mortgage and property taxes.
