Taxable valuation X Millage rate= Yearly Property Tax amount
(A simplified mathematical formula)
Property is evaluated each year by the county to determine the taxable valuation. The taxable value is not the market value. If either the valuation amount goes up or the millage rate (tax rate), we see an increase in the property tax amount. The legislature has capped valuations at 3% per year if homesteaded or 5% per year if not homesteaded. However, when homes are sold the cap is removed and the taxable valuation increases to market value.
Why is this important for you the buyer to know?
Most buyers have an escrow account with their lender, as part of their loan. An escrow account collects money and disperses it for taxes, insurance, and any mortgage insurance when the payments are due. Once a year, every year, the mortgage company does an audit on your escrow account called an escrow analysis. If there is not enough money in the escrow account to cover the taxes and insurance (these bills have gone up) it is called a shortage and the mortgage company will adjust your payment to recoup the increase as well as the money needed to correctly pay the amount next year.
After you purchase the home, the county will reassess your property. If the seller has owned the property for a long time, or has a senior freeze, or property values have increased exponentially like we are currently seeing– the taxable valuation will go up.
If your property taxes go up, your mortgage payment will increase when they do your first escrow analysis—a year after you purchase your home.
The lender uses the property tax rate at time of sale to set up your escrow account, not the amount of property taxes after the current cap is removed.
What does this look like?
Example only: Owner is paying $2600 a year. You purchase the property for $250,000 depending on the millage rate, your taxes increase to $3100 a year. This is a difference of $500 a year.
The bank will spread the shortage of $500 over the next year by dividing the amount by 12 and adding it to your monthly payment. In addition, they will need to collect an additional $500 divided by 12 in preparation for the following years taxes. Therefore, your house payment is going to increase $84 a month if you don’t pay the shortage or $42 a month if you choose to pay the shortage.
The second year, your taxes and house payment should level out. Although, your house payment will continue to adjust yearly based upon increases for taxes and insurance.
Please note, this is a very simple way of explaining what could cause your house payment to rise after you have owned the house. It is not meant to scare you. You might want to estimate what your property taxes should be and then start escrowing or saving that amount from the beginning on your own. Thereby eliminating the possibility of getting a huge increase in your home mortgage and not being prepared.
Equity Homes Team Keller Williams Green Meadow 