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Property taxes are usually based on your home’s appraised value and the local millage rate. Find out more about how much these taxes could cost you. 

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When you buy a house, you have to look beyond just your monthly mortgage principal and interest payments to understand the total costs of the property.

You will also have to pay property taxes as well. In some cases, you will pay extra on your monthly mortgage loan toward taxes, and the lender puts the money in escrow until it comes time to pay the tax bill. In other situations, you’ll just have to pay the taxes yourself once a year.

Regardless of whether you pay your taxes monthly or in a lump sum out of your bank account, they can add thousands of dollars to your total housing costs. As a result, it’s important to understand how they are calculated so you can get an idea of what you might owe.

Here’s how property taxes are calculated on your house

Property taxes, or real estate taxes, are typically collected by local governments and school districts. You might pay taxes to your town or county, as well as additional school taxes, depending on where you live.

While each location may have slightly different rules and processes, here is how your property tax bill is typically calculated.

The taxing authorities determine the value of your home. To do this, the county or municipality typically orders a periodic appraisal of the home. This means a professional determines its value every year or every few years, depending on your area’s policy.The county takes a percentage of the home’s value to come up with the assessed value. You are usually not taxed on the full market or appraised value of your home, but are instead taxed on a percentage of it. Local areas use a specific assessment ratio, such as taxing 40% of what your home is worth. So if your house appraised for $400,000 and your county taxes 40% of your home’s value, your assessed value that you are taxed on would be $160,000 (40% of $400,000).The county determines the millage rate. Counties determine a mill levy by figuring out the total amount of revenue they need and the assessed value of all of the properties that will be taxed. So, for example, if your local area needs to collect $2 million and all of the property in your area has a collective value of $100,000,000, then your county would divide $100,000,000 by $2 million to determine that a mill levy of 2.00% is necessary.You pay taxes based on the mill levy and your assessed value. So, for example, if you had to pay 2% on your home’s assessed value of $160,000, you would pay $3,200 (2% of $160,000) per year in property tax.

On your property tax bill, you will see your millage rate, which is the tax that you must pay per $1,000 in assessed value.

Why are property taxes important to understand?

It’s important you understand how this calculation works so you can prepare for taxes when buying a home. Property taxes are one of the ongoing costs of homeownership, and you’ll owe them for as long as you own the house. You can see the tax history of any property you are considering purchasing by checking your county’s website. However, since your home may be reassessed when it changes hands, your taxes could change after you buy. You don’t want to be taken by surprise if this happens to you.

Once you know how much taxes are likely to be, you can make sure your home is affordable. Ideally, total housing costs including principal, interest, taxes, and insurance will be below 25% of your income. If that’s not the case, take a close look at what the housing payments will do to your budget and disposable income so you can make an informed choice about whether the home is really affordable for you.

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