What do you need to know about property taxes? Great question! There are several points you should understand about property taxes and assessments before you buy your first home. If home buying is something you’ve been looking into, you’ve most likely been hearing the words “property taxes” and “mortgages” several times, but let’s dig a little deeper.
First off, you’ll want to do some research on where you’re looking to buy. You can easily look up the average property taxes in your area. This is how real estate taxes are calculated: Each year, the Department of Real Estate Assessments determines the value of real estate property in each county throughout our nation. For this example, we will use Arlington County – as in Arlington, Virginia – outside of D.C.! After the assessment is made, that number is then multiplied by the real estate tax rate in Arlington County. How do you get the real estate tax rate in respective counties you might wonder? It is set by the County Board each year. Assessments begin on January 1st of every year. Keep in mind – assessors do not determine your property taxes. What they do is make sure that the assessment you receive is fair and reasonable. Tax rates in Arlington are expressed in dollars per one hundred dollars of assessed value. For example, a tax rate of 0.996 cents per $100.00 would result in a real estate tax of $3,984 on a property assessed at $400,000. Understand? Want to know more about properties available in Arlington? Head here for your local Arlington, VA Property Management Company.
Homebuyers (especially new ones!) need to plan ahead for property taxes, which can quickly amount to thousands of dollars each year. So, you need to keep in mind that this is an expense you’ll need to BUDGET for! There are many traps that new homeowners can fall into. Like we said, you should research property taxes in your area so you are not caught off guard by increases in rates or assessments, among other numbers. To be on the safe side, you should never hesitate to contact the local assessor’s office to research properties. This is where Google comes in as your best friend!
Another word you may hear a lot is “escrow.” But, fear not! Escrow accounts can come in handy for the homebuyer. Unfortunately, many times, new homeowners are not as prepared as they should be for the hardship of property taxes. Because of that, many lenders require an escrow account. What is an escrow account? It is a place to set aside funds. Your lender or loan servicer estimates the amounts due; the borrower pays 1/12 of the estimate each month, and the set-aside sums are then used to pay the property taxes, insurance and sometimes other costs as well, according to BankRate.com.
Now, you’ve done your research and you’ve figured out an approximate amount you’ll be paying on your taxes. Congrats! The question now is…how do I actually pay these fees and taxes?
If you’re still paying on your mortgage (which you likely are) this is where your escrow account comes in! Your lender will have already set up this account for you as part of your loan paperwork during the buying process. Every month, your lender will collect insurance and tax payments from you. Where does that money go? Into your escrow account! Why? Because it’s used to pay your property taxes.
Once your mortgage is paid off (congrats!), the way in which you go about paying your property taxes will change – but just a little bit. You will still, of course, have to pay your property taxes, but now they will go directly to your county tax collector instead of into escrow.
This all sounds like a lot but you should know that many states offer multiple forms of property tax “relief.” This relief comes in the form of tax rate caps, homestead exemption, property tax deferral, energy tax relief, etc. Are you a veteran? Many states also have relief for military veterans. Check with your local Veteran’s Affairs office to see if you qualify in your area. You can look it up by location here.