More often than not, property tax payments can become very confusing for first-time homebuyers.
The details of property tax payments often get lost in the mix of monthly mortgage payments, homeowner insurance, PMI , and potential HOA fees –– all of which make up your total monthly mortgage payment obligation.
In this article, we’ll break down everything first-time home buyers need to know about property tax payments when planning their first purchase.
We’ll go over what property taxes are, how they're calculated, when you’ll need to plan to pay them, and more.
What Are Property Taxes & How Are They Determined?
Property taxes are annual fees levied by local governments for public services in the community.
Property taxes are used to fund local schools, fire and police departments, road maintenance, parks, sewer services, and recreational opportunities.
Property taxes are determined using the assessed value of your home and your local property tax rate. It’s important to note that assessed value differs from both the sale price of your new home as well as the current market or appraised value.
Instead of being controlled by the market, assessed home values are created by your local government tax office or property assessor.
These valuations are typically lower than the market price, which may seem alarming at first, but is actually to the benefit of homeowners. A lower assessed value means you’ll pay less in property tax.
Assessed values are then multiplied by your local property tax rate to determine your annual property tax payments.
Property Tax Determination Example
Since assessed values vary significantly according to local tax policies, we'll use the average home sale price in 2021 as a stand-in for this property tax calculation example.
The formula for determining your property tax is:
Assessed Value x Property Tax Rate = Annual Property Tax Obligation
$453,700 (Assessed Value) x 1.1% (Property Tax Rate) = $4,990.70 (Annual Property Tax Obligation)
How Do I Find Out What The Property Taxes on My Home Will Be?
Property taxes vary by county, so it can take a little bit of digging to uncover your potential property tax obligations.
Homebuyers that want to minimize their monthly property taxes can focus their search in states with lower average property taxes (like Hawaii, Alabama, and West Virginia) to increase their odds of landing a lower tax rate.
But because property taxes are determined locally rather than state-wide, they’ll still need to check in with the relevant county tax offices to confirm their preferred county’s tax rate.
When Will I Start Paying Property Tax on My Home?
Most home buyers will begin paying property taxes immediately after they close on their new property. Why? Because property taxes are (typically) included in your monthly mortgage payments by your lender. Most mortgage lenders estimate and collect a monthly portion of your annual property tax obligation to place in an escrow account until your annual payment is due.
While this pretty much takes the issue of property taxes out of homeowners' hands, it’s important to remember that the monthly tax payments rolled into your mortgage are based on your estimated tax obligations. Tax hikes, new value assessments, or any other extenuating factor can lead to an outstanding tax balance (or better yet, a refund!) at the end of the year.
The details in your closing contract can also impact your property tax payments immediately after purchase. In some cases, buyers may be contractually responsible for a portion of the seller’s property taxes. This typically occurs when buyers are motivated to close and want to offer a relatively pain-free method of sweetening the deal. On the other hand, motivated sellers may offer to pay out the remaining portion of their property tax obligation to lighten the tax load on potential buyers — and increase the appeal of their property.
Are Property Taxes Due at Closing?
Yes, property taxes are typically due at closing. However, this tax payment differs from ongoing monthly payments because your annual tax obligation will typically be split with the seller according to your closing date.
For example, if the annual property taxes total $3,000 a year and the closing date is July 2nd, the seller and buyer would each be responsible for $1,500 (or half) of the annual property taxes.
Are Property Taxes Included in Closing Costs?
Lenders typically include cash-due-at-closing documents that include property taxes among other fees and costs. The details of your closing contract will determine the specificities of your tax burden at closing, which presents buyers with an opportunity to negotiate.
A larger down payment is a great way to persuade sellers to cover their portion of the annual property taxes and provides more benefits to buyers compared to paying additional taxes.
By putting down a larger down payment instead of shouldering the seller’s tax burden, homebuyers can gain increased equity in their home and lower their monthly mortgage payments. It can also make their offer more attractive, and increase their odds of closing in a competitive real estate market.
Noah’s Down Payment Assistance Program is an accessible way for first-time homebuyers to increase the size of their down payment without shouldering additional monthly payments or interest. For example, even if you’ve only saved enough to make a 5% down payment on your dream home, Noah can come in with an additional 15% of the purchase price of your home to help you build a better down payment. This would then enable you to put down an attractive 20% downpayment and even avoid paying PMI.
Who Pays Property Taxes?
After closing property taxes are handled, ongoing property tax payments will become the responsibility of the buyer.
When Will I Have to Start Making Monthly Property Tax Payments?
If your property taxes are included in your monthly payment to your lender (and they probably are), an estimated portion of your annual taxes will be charged and placed in escrow as soon as mortgage payments begin.
If your lending agreement does not include property taxes, you’ll need to speak with your local tax office to determine when you’ll need to make property tax payments. Most counties collect property taxes annually, but some localities may adhere to a quarterly or bi-annual payment schedule instead.
Will My Property Tax Rate Ever Change?
Property tax rates can and do change, so homeowners should be sure to keep up with any updates to their local tax code. Common reasons for changes in property tax rates include neighborhood changes, state and local budgeting, and outdated assessed values.
How to Plan to Pay Property Taxes at Closing
It’s not uncommon for first-time homebuyers to sweeten their offer with a larger down payment or by paying the sellers’ remaining property taxes. However, planning for both of these expenses on top of all your other closing costs, may feel overwhelming.
Today, Noah’s down payment assistance program can provide up to $500,000 in interest-free down payment assistance. As mentioned, Noah can help you build a 20% down payment even if you’ve only saved enough to put down 5%. This may be just what you need to secure your dream home, and will come with zero monthly payments for 10 years.