When calculating the cost of owning a home, a major monthly expense that first-time buyers often overlook is property taxes. Understanding how they work and how they’ll affect your budget is crucial for making a smart purchase and planning for long-term affordability.
What Are Property Taxes?
Property taxes are annual taxes paid by homeowners to their local government. These taxes help fund essential services, including public schools, police and fire departments, road maintenance, parks, and libraries. The amount you pay depends on the assessed value of your home and the local tax rate.
How Are They Calculated?
Property tax is typically calculated using two main factors:
For example, if your home is assessed at $400,000 and your local tax rate is 1.25%, you’d pay $5,000 per year in property taxes.
Why It Matters For Buyers
When calculating how much home you can afford, many buyers focus on the mortgage payment. But property taxes can add hundreds of dollars a month to your costs. In fact, in some areas, taxes are almost as high as the mortgage itself. It’s crucial to factor taxes into your total monthly housing budget.
Things to Look For
Here are a few tips for evaluating property taxes when house hunting:
How to Plan For Them
Most lenders will collect property taxes as part of your monthly mortgage payment and hold the funds in an escrow account, paying the taxes on your behalf when they’re due. This makes budgeting easier, but it’s still wise to review your annual escrow statement to understand how your taxes are changing.
Educating Yourself Now Helps You Avoid Future Surprises
Understanding property taxes is just as important as knowing your interest rate or down payment. These taxes directly affect your monthly costs and the long-term affordability of your home. By educating yourself now, you’ll avoid surprises later and feel more confident as a new homeowner.
Thinking about buying? Don’t forget to ask your real estate agent about the local property tax situation so you can make an informed and financially sound decision.