Now that you own a property or are considering becoming one in the near future, you may be wondering how property taxes and homeowners insurance premiums are calculated. this is good to know so you can [anticipate all the costs associated with . Let’s talk about property taxes first.
Almost all property, such as land, buildings or houses, is subject to property tax. Your personal property, such as the contents of your home, is not subject to property taxes.
why you pay property taxes
Property taxes help local, state, and federal governments fund education, emergency services, transportation, parks, libraries, and other recreational activities.
government councils, boards, and other legislators meet at least once a year to decide how much is needed for the coming year to cover the cost of any improvements, construction, upkeep, and maintenance of the items listed above.
They decide on a rate that is calculated as a tax and is paid by homeowners in the communities. your tax money is used within your community and some of the improvements can even increase the value of your home.
how property value is determined for tax purposes
A tax assessor reviews all the fair market values of properties in an area to establish an overall property value in your area.
Your property tax is based on the assessed value of your property and your tax rate. you may see the words “ad valorem” tax, which simply means that it is based on value.
calculate tax rate
So, the first thing that affects the cost of your property tax is the tax rate, which is known as the per thousand levy. A mill levy is the assessed tax rate used by local governments. The mil tax is determined by taking the amount of revenue a government needs and dividing it by the total value of property within that jurisdiction. a mill is equal to 1/10 of a cent. for every $1,000 of property value, one million equals one dollar in property taxes. all milling taxes for an area are added together to form the total milling tax.
calculate property tax
once you know your interest rate, you will need to know the value of your property to calculate the amount of property tax. You can get the value of your property from the tax assessor’s office or from your most recent appraisal showing the market value of your property. Many tax advisors have websites where you can check the tax value of your property.
Property tax is calculated by multiplying the assessed value of the property by the mill rate and then dividing by $1,000.
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Tax rates may change as governments in your area determine they need more funds to operate. all the elements that determine the amount of your property tax are itemized on your tax bill.
The locality determines how often you pay property taxes. You may be required to pay taxes quarterly, semi-annually, or annually.
let’s see an example
Your community has a school district, county government, and city government that have determined how much they need to operate for the next year. They calculated their mill liens by taking the total income needed and then dividing it by the total property value in their community.
The school district has set a 1% mil levy. the county needs 3%. the city needs 0.5%. the total grind rate is 4.5 (1 + 3 + .5).
The total value of your property is $200,000, which includes the land and your house.
Your property tax is $200,000 x 4.5/$1,000 = $900.
may be eligible for an exemption
Some states give you a tax break on property taxes in the form of a homestead exemption. the exemption allows you to protect part of the value of your property from the application of a tax.
For example, if you live in a state that gives you a tax exemption on the first $50,000 of your home’s value, and your home is worth $250,000, you’ll only pay taxes on $200,000.
Check with your tax advisor’s office to see if you are eligible for a homestead exemption.
Now, let’s take a look at homeowners insurance.
many factors affect the cost of homeowners insurance
How much you will pay for your homeowners insurance depends on many factors, such as the value of the home, how much coverage you need, the deductible, the type of coverage you need, and the claims history of the area where the home is located, just to name a few.
Your insurance agent also takes into account discounts for combined policies, discounts where you work, and your credit score.
The cost of homeowners insurance is based on the replacement cost of the home and not the purchase price.
This means that the home’s value is established by an appraisal method that estimates how much it would cost to rebuild or repair your home to its original condition after a disaster or damage.
The national average is $95.51 per square foot, but it can be different depending on where you live.
If you’re in the early stages of buying a home, you can ask your real estate agent to ask the seller how much you pay for home insurance to get an idea of how much you’ll have to pay. According to valuepenguin.com, the average annual cost of homeowners insurance in 2016 is $952.
budget for the payment of taxes and insurance
The good news is that if your lender has set up an escrow account for you, you will pay 1/12 of your tax and insurance bills each month as part of your monthly mortgage payment. Your lender will make your tax and insurance payments on your behalf as they come due.
Once a year, they will adjust your monthly payment to reflect any changes in your tax and insurance amounts.
Unfortunately, your lender has no control over the cost of property taxes and property insurance. If you have questions or disputes about the amount paid, you should contact your tax assessor’s office for your property taxes and your insurance company for homeowners insurance. If you’re just beginning your home buying journey, don’t hesitate to contact a mortgage banker for more information about the loan process or if you have any questions.