Sarah Peterson

Published On: July 19, 2022

Homeownership comes with lots of new expenses and increased fees, like homeowner’s and title insurance, pricier utility bills, and property taxes.

Even if you’re prepared for higher bills, it’s important to know exactly how much they’ll spike up. Especially when it comes to property taxes.

Calculating your property taxes probably isn’t your idea of a good time. Plus, your local government will figure it out for themselves and automatically charge you.

But the tax assessor can sometimes get it wrong and overvalue your house. What does this mean for your taxes? That you’re overpaying.

That’s why it’s worth understanding exactly how property taxes are computed and getting a general idea of how much you’ll owe.

What Is Property Tax?

Property tax is a tax paid on the property by the individual owner.

It is known as an “ad valorem” tax, which is Latin for an “according to value”. In other words, property taxes are based on an assessment of the property’s value.

Your local government will consider the location, assess the overall worth, and apply a tax amount accordingly.

What is revenue from property taxes usually used for?

Your property taxes will go towards things needed to fund the local community, like school districts, libraries, road construction, police and fire departments, and other services.

It’s a major source of income for the city or county. Sometimes your tax bill will specify exactly what your property taxes are going toward.

Assess Your Property’s Value

The local tax assessor’s office is in charge of tracking every single piece of real estate and land in the district. They will typically keep a database of each property’s value.

Assessors are able to estimate the market value of a property based on three varying methods.

Here’s a breakdown of each.

  1. Sale Comparison

Just as a homebuyer analyzes comparable homes before making an offer, assessors can use similar data to determine the worth of a property. They will analyze criteria like the condition of the property, location, improvements, and overall market trends.

  1. The Cost Method

This is when the assessor determines how much it would cost to replace or build your home from the ground up. Everything is included in this calculation, i.e., materials, labor, and other items that add to the home’s definitive value. They assessor will also take depreciation into account for older homes.

  1. The Income Method

This tactic is used to determine how much of an income would be made if the property were rented out. It’s important to note that the income method is primarily used for commercial properties. The assessor will consider factors like cost of maintenance, management of the property, insurance, current rental rates, and the return on investment.

Does appraisal affect property tax?

Keep in mind – you’ve just purchased this house and probably received an appraisal of the property’s fair market value. This is a valid number to use when determining what your property taxes may cost.

But assessments usually happen annually, meaning your property taxes could go up next year. You can then use the methods listed above to get a general idea of your home’s newly assessed value.

How to calculate property tax?

Taxes are calculated by multiplying the property’s value by the tax rate.

Property tax = property value x tax rate

So, how do you figure out the tax rate? Stick with us here, this may get a little confusing.

The rate is often called a “millage rate” or a “mill rate”. One mill equals one-thousandth of a dollar, or $1 for every $1,000.

Keep in mind – local governments charge different mill rates.

Here’s a hypothetical:

The local mill rate is 20 mills. This means the homeowner will pay $20 for every $1,000 of the property’s value, or 2%.

  • The property was assessed at $100,000.
  • Multiply the property’s assessed value by the mill’s rate percentage.

In this case: $100,000 x 2% = $2,000 of property taxes owed per year.

How to dispute your property taxes?

As mentioned earlier, sometimes assessors can get it wrong. If you think your home’s assessed valuation was high, you can grieve the property taxes.

To do this, you’ll need to prove that the assessed value does not correctly portray the property’s true market value.

First, you should make a list of comparable sales and their tax records. This is public information and can be seen on the local tax assessor’s website. The goal is to show similar homes are valued lower than yours and therefore have lower taxes.

You can bring these findings to your assessor’s office to dispute the process. This can also be done through a lawyer, who will appeal the property’s taxes on your behalf. Typically, they only charge you a fee if they win the claim.

How to pay property tax?

There are two ways to pay your property taxes.

  1. First, you can choose to pay the taxes as a part of your monthly mortgage payments.
  2. Or you may opt to pay them in a larger sum, annually or semi-annually.

The check should be delivered directly to the local tax authority. This method is more commonly used among homeowners who do not have a mortgage on the property.

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