Money

Don’t Overlook This Big Expense When Looking for a Home

When you are buying a home, chances are good you’re focused on two things: How much your monthly mortgage payment is going to cost you, and what the kitchen looks like (or is that just me?)

It’s undoubtedly important to understand how much your mortgage principal and interest payment will be, as failing to pay the bank could have dire consequences — such as foreclosure. You do not want to take a chance on these costs taking up too much of your money.

But there’s another big expense to think about as well: Property taxes. If you haven’t owned a home before, you may not be used to being taxed on where you live. But you must prepare for this, as annual property taxes can sometimes cost as much (or more) than the amount you have to pay to your mortgage lender each month.

Property taxes can take a huge chunk out of your budget

It might not make sense that you have to pay your local government just for the privilege of owning a home in your area, but that’s the reality of life in much of America. In fact, the median property tax bill across the United States was $2,971 in 2021, and the effective property tax rate nationwide came in at about 1.11%.

This means if you buy a $500,000 home and you pay the median rate, you’d be looking at an annual property tax bill of as much as $5,550. If you aren’t expecting this added cost on top of your mortgage principal and interest, that could be a very unpleasant financial surprise.

To make sure you aren’t spending more than you should on your house, you’re going to want to be sure you keep your total monthly expenses — including your mortgage, property taxes, and any homeowners association dues, below around 25% to 30% of your income.

More: Check out our picks for the best mortgage lenders

Now, in some cases, your mortgage lender is going to want you to make these monthly property tax payments as a part of your monthly mortgage payment. If that’s the case, it’ll divide up how much you owe each year into monthly payments and add that amount to your mortgage bill. So, if you owed $5,550, you’d pay an extra $462.50 a month. Your lender would put this money into an escrow account and take care of paying your taxes for you.

Not all lenders require escrow, though, so if yours doesn’t, be absolutely sure you are saving for property taxes all year long so you don’t get surprised by a huge bill when your county sends out a request for payment.

How much will your property taxes be?

Figuring out how much your property taxes are actually going to be can be more complicated than it seems. That’s because you aren’t usually taxed based on the price you paid for your house, but are instead taxed on the assessed value of your home. Depending on the formula your town uses, that’s typically going to be less than the market value.

You can get a general idea of what your tax bill might be by looking at property tax records to see what the prior owners were paying. However, if you make upgrades to the property or if the former owners qualified for special discounts you don’t (like a widower’s exemption), your tax bill may be a little different.

Don’t forget to take this into account when you’re looking at the home you buy. Since tax rates can vary from county to county, you may want to look at local rules when deciding where to make your purchase. If you could be located a few streets over and pay a lower tax rate, why not do that? Just check the tax collector website for the areas you’re interested in to get an idea of the rate you might pay, so you can make an informed choice — and not be caught off guard by your property tax bill.

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