If you are thinking about buying a property or a real estate, you may be wondering are property taxes included in mortgage. Tax isn’t exactly something that people love to pay. Paying the tax is just planning a trip to your dentist. It’s a crucial part of life, and you must do it, but it’s not the exciting part. And property taxes are just the same as others.
For seasoned homeowners, they understand that property taxes are the crucial part of the deal. However, new home buyers tend to overlook the property taxes and the fact that those taxes can have a huge impact to their budgets. Just like buying a car; those who buy a house or a property tend to be able to afford it during the purchase, but they forget to include taxes or maintenance and care costs into their regular spending. If you are thinking about buying a house, never forget about the tax.
Just because you have to deal with the tax, it doesn’t mean that you really know what it is all about. The common questions about property and taxes are: are property taxes included in mortgage? How are those taxes paid off? How often do you have to pay for those taxes? When is the right time to pay the taxes? You should know the basic facts of these property taxes so you prevent making mistakes that can cost you not only hundreds but also thousands of dollars.
Learning More about Property Taxes
Before you learn about are property taxes included in mortgage, you should know what the property taxes are all about. Property taxes are the fees that local governments collect in a yearly manner to raise money for the community’s public services. There’s a portion of that collected money to go to the local fire departments, police, road maintenance, and schools. When your (local) government finally sends people to fix a hole in your neighborhood road, it’s mostly likely that they are funded by your property taxes.
The Obligation of Paying the (Property) Taxes
Do you need to pay the property taxes? Unfortunately, yes. Everyone owning properties must pay the (property) taxes, including homeowners. What if you have other property types, such as an inherited farmland from your grandmother or investment property? You are obliged to pay the property taxes on those properties too. And keep in mind that the obligation to pay the property tax lasts for as long as you live. It means that you have to pay the property tax for good.
However, you won’t have to worry about property taxes if you are renting a space, such as renting an office space or an apartment. It’s your landlord’s obligation; not yours. As long as you don’t own that property, you aren’t obliged to pay any property tax or whatsoever.
How Is the Property Taxes Paid?
The property tax is usually included in the mortgage payments, together with the homeowner’s insurance, interest, and principal. This should answer your question are property taxes included in mortgage. If you make timely payments on your monthly mortgage, it’s highly likely that you already pay the (property) taxes.
Here’s how you pay the property taxes within your mortgage payment: Imagine that Bill decides to buy a house. His mortgage lender has estimated that they will owe around $1,600 for the property taxes on a yearly basis. Most lenders would divided that amount by 12 (for 12 months), and such a thing also happens to Bill’s lender. It is done so that Bill won’t have to deal with such a hefty amount of money when the year ends.
Let’s say that $1,600 is divided by 12, resulting in $133. It means that Bill has to pay $133 for his property, as the part of their monthly mortgage payment. In most cases, the lender will set that $133 in a separate account, known as escrow account. He/she would use it to pay for Bill’s property taxes to their local government.
Keep in mind that most mortgage lenders would only provide the estimate of your property taxes. Don’t be too surprised if you may have to pay extra or you get some refund. Whatever the outcome is, you should be prepared. And how would you pay for the property taxes if you don’t have a mortgage. The question are property taxes included in mortgage won’t be applied to you. But you will deal with different schemes.
Paying the Property Taxes without Mortgage
Paying off the house is one of the most satisfying feelings in the world. It is somewhat freeing, knowing that you no longer have debts related to your house. But just because you have finished paying off the monthly mortgages, it doesn’t mean that you are finished with the property taxes. As it was mentioned before, you are responsible for the property taxes for good, as long as you own the property.
When you have paid off your mortgage, you have to pay the taxes to your local government directly. How often you pay it relies on your location because the local governments may have different policies are regulations about how you should do it. Some local governments may ask you to pay a lump sum directly, which means you do it once in every year. It’s also possible that they may ask you to break the taxes into smaller payments for several months apart.
The exact date or day when your taxes due rely on your location, so it’s always a good idea to pay attention to your tax bill when it comes in your mail. This kind of tax isn’t something that you can skip. If you are behind your payments (or you decide not to pay the tax at all), your local government has the right to take your house and then sell it to repay the (tax) debt that you owe. They have the legal rights to do so even when you have completely paid off your house.
That’s why, it’s always better to plan ahead when you want to handle your property taxes. First of all, you need to calculate how much you owe. Divide your property tax bill by numbers of months between the bills. Let’s say that you owe the tax once a year, you want to divide the amount by 12 (months). If you pay twice within a year, then divide the amount by 6, and such thing alike. This mechanism may not be included in the question are property taxes included in mortgage, but you know how to do it.
After you have found out your calculation, create a sinking fund on a monthly basis. This one is used to set your money aside, so you won’t have to suffer from a headache each time you need to pay your property taxes. This sinking fund can also help you have a better management (and plan) related to your property taxes.
Calculating Your Property Taxes
There are two things that determine the amount of money you have to pay for the (property) tax: the tax rate of your local government and the property’s assed value. You only need to take the assessed value and multiply it by the tax rate. So, property tax = property tax rate x assessed value
For example, your house’s assessed value is $200,000, while the tax rate of your county is around 1%, which means that your (property) tax bill would be $2,000 a year. If you have to divide it by 12, your property taxes would be $167 per month. This is the amount of money that goes to your sinking fund or included in your mortgage.
- About the Assessed Value
You need to keep in mind that a house’s assessed value isn’t always the same as the price that you spend when buying the house. The assessed value isn’t about how much you can get from the house when you sell it. The value of the house when you sell it is called as market value or appraised value.
It’s the property assessor or local government tax assessor who sets the (assessed) value for your house, and the number is typically lower than the market value. This is the amount that you need to pay for the property tax. If you aren’t really sure about your house’s assessed value, find it out from your tax bill. You can also find it out on the county or city tax assessor’s site
- About the Property Tax Rate
Because the governments are the ones who set the tax rates, the amount of your payment rely on the area (or county) that you live in. it means that the property tax rate for a condominium right in New York City’s heart won’t be the same with the rate for a house in Arizona’s suburbs.
In 2020, homeowners generally have to spend around $3,800 for property taxes with average rate of 1.1%. The highest property taxes is in New Jersey with average rate of 2.2%, while the lowest one is in Hawaii with average rate of 0.37%
How to Manage Your Property Taxes
Even after you know the facts about are property taxes included in mortgage, you still need to manage your spending. When you are looking for a new home, don’t only think about how big the backyard is or how majestic the structure is. You need to think about the property taxes. You don’t want the excitement of having a majestic house is ruined when your first mortgage is due.
As a rule of a thumb, your monthly mortgage spending shouldn’t exceed 25% of your salary or take home pay. In the event your property taxes are responsible for your monthly payment to go over 25% of your own income, then it would be wise to find the house elsewhere.
We can go back to Bill, with his income of $6,000 a month. If following this scheme, his maximum payment for the house is maximum $1,500 per month. He has found 2 houses in the neighboring towns that both cost $200,000 and both have assessed value of around $160,000. However, the tax rate is different. House A has 1% rate while House B is 2%. You’d be surprised to find out that even 1% can play a crucial role in his budget.
In House A with the price $200,000, assessed value of $160,000, and tax rate of 1%, his annual total property tax would be $1,600, which means that his monthly tax would be $133. His total monthly payment would be $1,388. In House B with the same price and assessed value, but tax rate of 2%, his annual total tax would be $3,200, which means that his monthly tax would be $267, and his total monthly payment would be $1,522.
It means that House A fits his budget, while House B would be exceeding it. As you can see, not calculating your mortgage and your property taxes can really bust your budget, affecting your financial standing.
As you can see, the fact about property taxes can help you determine your financial management and condition. Now that you know the answer to are property taxes included in mortgage, you should manage your spending carefully.