What Are Real Estate Taxes?
Real estate taxes are taxes paid based on the perceived value of a home. You might have heard them referred to as property taxes; these have the same meaning except property taxes extend to other forms of property. Real estate taxes are solely for homeowners. Properties are taxed in order for the government to have funds for community services. Everyone has to pay taxes on the property they own.
What Do I Owe?
Property tax is calculated based on the tax rate set by your local government and also the value placed on your property. Value is assessed by property assessors, and the amount is typically below market; this means lower tax rates for you. Property tax is different for every area and it is also not a fixed amount, which means it can change at any time. If you want to calculate your taxes on your own, simply multiply the value of your home by the tax rate. For example, if your home is worth $250,000 and your tax rate is 2%, you will owe $5000 per year in property taxes.
Is My Tax Bill Too High?
As a general rule of thumb, your mortgage payment and property taxes should not exceed 25% of your monthly income. If you make $8000 per month after taxes, your mortgage and property taxes should not be more than $2000. You don’t want to strain yourself financially, plus you need to think of your other expenses. Make sure to factor in real estate taxes when you are searching for a home. If your tax bill will end up being more than one-fourth of your monthly income, it is a good idea to explore other home options.
How to Pay Property Taxes
The good news is you do not need to worry about another bill. If you are paying your mortgage each month, you are already paying your real estate taxes. Your mortgage is a combination of your principal payment, home insurance, interest, and taxes. Since real estate taxes are not fixed, the amount you pay on top of your principal is a mere estimate. The money you pay each month is set aside in an account by your mortgage lender until the bill is due. If you end up owing more you will receive a small bill; if you end up paying too much, you will receive a tax refund at the end of the year. Make sure you pay your mortgage on time each month to avoid falling behind and accruing more interest.
My Mortgage Is Paid Off, What Now?
If you have paid off your balance, this is a major accomplishment. However, you still need to pay taxes on the home you own. The only difference is that once you pay off your mortgage there is no middleman. This means you will need to pay your real estate taxes directly to your local government on your own instead of to your lender. Do not neglect your tax bill, the consequences are quite serious. Just as you can lose your house if you fail to pay your mortgage, you can lose it by failing to pay taxes as well. A paid off balance does not protect you from losing your home if you don’t pay your real estate taxes. A good way to avoid falling behind once you no longer have a lender to hold you accountable is to do the math ahead of time. Figure out an estimate of what you will owe each year and set the money aside each month to send to your local government. This way you will not find yourself caught off guard by a huge bill. Real estate taxes are an essential expense for all homeowners, even if their home is paid off. When searching for a new home, make sure to factor in the estimated taxes to avoid going over budget and putting yourself in financial distress. While you are paying off your mortgage, taxes will be included in your monthly bill. However, after you pay off your mortgage, you will need to pay your real estate taxes on your own. As long as you own your home, you will have to pay real estate taxes, make sure to plan ahead to avoid falling behind.