Everything Homeowners Need to Know About Annual Tax Assessment

For many municipalities across the country, property tax assessments are a hot topic this time of year. There always seems to be some group of homeowners caught off guard by a sharp property tax assessment increase, like these cases in rural North Carolina or cosmopolitan Chicago. Others wonder if they can scrap their escrow account and just pay escrow items directly. These are valid concerns. Property tax is an important issue for homeowners. However, there's plenty homeowners don't know about tax assessments. We hope this post will serve as a primer for the uninitiated.

What Is a Tax Assessment?

Property tax assessments are taxes levied by local governments on a property. The tax, which is primarily used to fund local schools, libraries, and municipal services, isn't imposed on a person but assessed on the property itself. If you're the current homeowner, these property taxes become your responsibility. This is true even in the case of back taxes, where a previous owner failed to keep up with the bill. Nearly all real estate in the country is subject to a municipal property tax, though exceptions include tax abatement and other buyer incentive programs. Because tax assessments are determined at the local level, rates and tax structures vary substantially from place to place.

How Is It Determined?

Investopedia notes that a homeowner's property tax bill is determined by three factors: the assessed value of the property, any exemptions for which a homeowner qualifies, and the local property tax rate. The assessed property value could be the fair market value of the property, but for some municipalities, it's the market value multiplied by an assessment percentage rate. Local governments each have their schedule for assessing and reassessing local property values. A majority reassess values on an annual basis, while others assess values every other year or when the property is sold. Exemptions can be a boon to some homeowners, lowering a property tax bill by offering a discount on the assessed value for taxing purposes. One common exemption is the owner-occupant or homestead exemption. In this case, the property tax assessment for qualifying primary residences is lowered, but not for vacation or investment properties. Tax rates vary by jurisdiction, with the final assessed value multiplied by a mill rate, a percentage of the value. This number is what ends up on a homeowner's annual tax bill.

How Are Property Taxes Collected?

Property tax assessments are generally collected in one of two ways: via a mortgage escrow account or by direct payment to the taxing jurisdiction. Most homeowners with a mortgage have a mortgage escrow account, where the lender collects monthly payments for the loan principal, interest, property taxes, homeowners insurance, and private mortgage insurance. Taxes and other escrow items are billed by the lender in equal monthly installments, rather than all at once. This bundled housing payment is collected by the lender, who then pays the bills on your behalf when they are due. Many homeowners consider an escrow account a convenience. Insurance premiums and taxes are paid on time, and owners only have to keep up with one bill.

Do I Have to Have an Escrow Account?

Still, not all homeowners like this setup. Some prefer to pay tax assessments directly. However, this is only possible in some circumstances. Lenders require an escrow account for common loan products, including Federal Housing Administration (FHA) loans, Veterans Administration (VA) loans, and for certain high-cost home loans. Most conventional loans also require an escrow account, though a lender might consider waiving the requirement in certain cases, such as when a homeowner has more than 20 percent equity. Even with a loan that requires an escrow account upfront, some homeowners may be able to cancel it down the road. Rules vary from lender to lender but typically include a loan-to-value of less than 80 percent, a loan exempt from private mortgage insurance, and a mortgage in excellent standing. However, a lender may still require proof of payment for former escrow items, which could make canceling the account more trouble than it's worth.

How Do Property Taxes Affect My Housing Payment?

Property taxes can have a big impact on homeowner budgets. While taxes are a smaller slice of your overall bundled housing payment than, say, the loan principal, a tax hike can still hurt. Taxes aren't the only item that can affect a housing payment. If you find your housing payment has gone up, it could be related to a tax assessment, but it could also be a change to the loan interest rate, in the case of an adjustable rate mortgage, or the premium for your home insurance. It's also possible for property taxes to fall. Larger economic factors can cause a property tax assessment mill rate or assessed value to fall, but such cases are rarely all good news. Take, for example, coastal Virginia property owners in Hampton, Va., whose assessed values are down. The reprieve in taxes comes with more frequent flooding and higher flood insurance rates. Across the country in Weld County, Colo., homeowners have been told the property tax mill rate will be decreasing for the first time in a decade. However, since home values continue to rise, those residents will likely pay an average of four percent more in property tax this year.

Can I Appeal a Tax Increase?

It's simply a fact of homeownership that, from time to time, property taxes go up. This can mean your monthly house payment rises, due to the increase, if you have an escrow account. Or, it could mean your municipality bills you for a new year of taxes that could be hundreds or even thousands of dollars more, all due upfront, if you don't have an escrow account. Needless to say, homeowners aren't thrilled about either scenario. In most cases, there are appeals processes homeowners can take when a tax assessment rises. Tax assessment letters usually spell out that appeals process or direct homeowners to a government info website that does. Appeals can be lodged by the homeowner directly or through a third party. Bankrate cautions that while third-party help can be a blessing, homeowners should ask upfront about cost, fee structure, and the firm's reputation. HouseLogic adds that homeowners should weigh whether the effort and cost of an appeal will be worth the potential savings. Sometimes it is. Last year, nearly two-thirds of Woodlands, Texas homeowners who appealed an assessment increase won on appeal. However, sometimes it's not worth it. There's always the possibility that a thorough review of your assessment could lead to an even higher assessed value and higher taxes. If you do consider an appeal, make sure to first consult with a tax or real estate professional for expert legal advice.

Final Thoughts

When it comes to homeownership, property taxes come with the territory. If you're considering a home purchase, make sure your budget accounts for the costs of taxes and ask your real estate agent and lender about applicable escrow account rules and local laws. If you're already a homeowner, make sure to keep up with your taxes. Failure to do so could lead to foreclosure. Lastly, if you're worried about a tax increase, read your assessment letter carefully and consult with a professional if you do consider an appeal.