There are two expenses to consider when picking out the amenities for your new home: purchase price and property tax.
Many home buyers are unfamiliar with the cost of property tax and how their choice of amenities will impact it. That is because taxes are more confusing and less exciting than purchase prices.
This article will clarify how to calculate property tax and the impact it has on your budget so that you can better prepare for your home search.
What is Property Tax?
In America, it seems like we pay taxes on everything. Yes, that even includes your home. If you’re a first-time homeowner, or even if you’re not, you might be new to the concept of property taxes. These are taxes based on an assessment of the value of your property.
Where the Money Goes
The taxes you pay on your property go towards funding certain things in your community. The money could go to the upkeep of parks, roads, libraries, or different essential departments within your town or county. Your property tax bill might show what your money goes to fund and how much of it goes to which department.
How Property Tax is Assessed
Now that you know what property tax is, why you must pay it, and what it goes towards, we can elaborate on the tricky part: How the government assesses your taxes.
Your local assessor’s office will determine the value of your home. Depending on the laws in your state and town, an assessor must evaluate your home yearly or every five years.
There are a few different things that go into calculating how much you must pay each year on your property.
Millage Tax / Mill Levy
The mill levy or millage tax is the tax rate applied to an assessed properties’ value. One mill represents $1 per every thousand of the property assessed. Usually, each jurisdiction tallies their mill levies. The totals are then added together to form the mill rate for every region.
The county, city, and school districts each can levy the properties in their perimeters. Therefore, they will determine how much money they need to keep everything in working order. Then, they will convert the number of funds to mill levy. Each mill levy will be added to determine a total mill levy for the entire area. This number will be a factor in determining your property tax.
An example of how to calculate a mill levy is if the total assessed property value within a county is worth $200 million. The county might decide that they need $2 million for the entire year to keep things running as usual, if not better. They calculate this fee after the schools and towns within their borders have determined how much they will need for the year. The money funds things such as maintaining parks, repairs on roads and bridges, and funding for the fire department. That would mean that the percentage of mill levy for the county would equal 1%. That is the percentage factored into your property tax.
Three Ways to Determine Property Value
As you see, one factor that goes into calculating property tax is a mill levy, which is determined by your county.
To determine the value of your property, the assessor will choose one of three ways to calculate that amount.
1. Sales Comparison: Using this method, the assessor will compare your home with other homes that have sold in your area recently. The assessor can then adjust anything to make your property more or less valuable than the ones that have sold. Some things that can make your home more valuable than the others is if you have just remodeled your kitchen with the most beautiful marble countertops and backsplash. Or, maybe you’ve built that great deck out back that all the other houses like yours don’t have.
2. The Cost Method: When an assessor uses the cost method, they will estimate how much it will cost to rebuild your home from scratch. The estimate will include the cost of the materials and labor. If your property has some age, they will factor in the depreciation rate and then the value of your land.
3. The Income Method: A method commonly used for commercial and business properties is the income method. The assessor will determine how much a company can expect to earn if the property was rented out. That amount will include the cost of maintenance, rental rates, and insurance expenses.
Calculating Property Taxes
Finally, after you know what goes toward determining your property’s taxes, we can talk about how everything is tallied to determine what exactly you should expect to pay.
It’s straightforward: the value of your property multiplied by the mill levy.
Keep in mind that these numbers will vary from state to state.
For example, say your home’s value was determined to be $200,000. Based on the model of the mill levy mentioned earlier of 1%, you would multiply $200,000 by 1%, equaling $2000. So, your property tax would be $2000 per year.
How To Pay Property Taxes
You might be thinking, “How do I pay my property taxes?”
Your monthly mortgage payment can include your property tax. It can also be paid in full once a year or paid semi-annually every six months. Some local places in your community might even accept monthly payments.
Taxes are never the most enjoyable expense to pay, but they do not need to be a headache, either. Knowing your property tax and planning for it in your budget will keep this expense from surprising you.
If you still have questions or concerns, Homes for Heroes is ready to answer any questions you may have about the home buying process and how we help heroes save. Just click here and let us know if you are interested in buying, selling or refinancing a home.
Our local real estate specialist in your area will contact you to answer your questions and guide you through the process. Our real estate and lending specialists are devoted to serving you as well as you serve your community.