| Jack Jenkins Homes
Homebuyers Beware: You Might Have To Pay More Property Taxes Than You Think
Price is one of the most critical factors in buying a home. But there’s something else you need to consider when budgeting for a new house: property taxes.
When scrolling listings for your dream home, you’ll typically see property tax estimates listed. But that doesn’t mean the current tax will be your effective tax rate as the new property owner.
Instead, when a home changes owners, the property taxes sometimes will be higher than what the current owner pays.
This could have some bearing on whether you can afford a certain home. For instance, when you’re qualifying for a home loan, you have to show you can handle paying the property taxes and the principal and interest of your mortgage.
So before you start house shopping, here’s what you need to know about property taxes.
How are property taxes determined?
Your state and local authorities determine how much you owe in property taxes annually. Those taxes are used to help pay for public services (think law enforcement and schools).
“And how much you’ll owe in property taxes is based on a home’s appraised value, taxable value, and the local tax rate,” says Will Wiggins, senior property tax consultant at North Texas Property Tax Services.
First, an appraisal office determines the home’s value, based on such factors as the square footage, age and condition, and the housing market.
“Then the taxable value is the appraised value, minus any tax exemptions a homeowner qualifies for,” says Wiggins. “The formula is the same in every state, but property taxes will differ based on local value and tax rates.”
Once an amount is established, homeowners pay property taxes either directly to a local tax office or as part of their mortgage payments.
Why property taxes can differ
“Buyers see the taxes listed on a listing and assume the payment, and cash to close, will be that amount,” says TJ Brisbois of the Brisbois Group.
But property taxes can cost hundreds or even thousands more than what the home’s current owner pays and can increase your monthly mortgage payment.
Here’s why: Many states offer tax breaks for disabled veterans, first responders, and senior citizens, among other concessions. In fact, the seller could have more than one tax exemption.
How property taxes can jump
So just how much can taxes increase? Let’s say a seller has a senior property tax break and something called the homestead exemption (which is essentially a law that helps protect a home’s value). And because of these tax breaks, the owner pays $1,500 in yearly property taxes.
If a new owner buys the house, the tax bill will be higher by hundreds or thousands of dollars, because the seller’s tax exemptions (the senior tax and homestead exemption) don’t transfer to the new owner.
But that’s not to say that the new owner couldn’t get a homestead exemption or qualify for other exemptions. Instead, all homebuyers should do some homework on any property they’re considering, to determine if they qualify for any tax breaks.
How to estimate property taxes
So what happens if you don’t qualify for any property tax breaks?
Whether you’re just looking or ready to buy, there are a few ways to get an accurate estimate of property taxes for the house you have your eye on.
“Potential homebuyers should have their lender prepare new estimates every time they find a home,” says Jason Lerner, vice president at George Mason Mortgage. “Lenders have additional resources and can identify if a property has underreported taxes.”
Not working with a lender yet or buying a house with cash? Then your local tax assessor’s office or a real estate agent should be able to tell you if there are any exemptions or freezes on the current tax bill, says Brisbois.
How to avoid tax surprises
Many professionals eyeball your real estate transaction before you get to the closing table. And these multiple layers of review from the loan officer, underwriter, title company, and real estate agent will help ensure the property taxes aren’t underestimated or overestimated.
“We verify the taxes with the taxing authority,” says Lerner. “The title company involved in the transaction will also confirm exact property taxes with the county—and be extra diligent if the advertised taxes seem low for the home’s value.”
Still, even with due diligence, property taxes could be underestimated during the escrow analysis—or when your mortgage company receives the final tax bill for your new property.
But if something does go south with your taxes, you can pay the tax difference in a lump sum. Then you’d have the correct prorated property tax included in your monthly mortgage payment moving forward.
Conversely, you’ll get a refund if your tax is somehow overestimated.
The post Homebuyers Beware: You Might Have To Pay More Property Taxes Than You Think appeared first on Real Estate News & Insights | realtor.com®.
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