Why Do You Continue to Pay Property Taxes Even When You Pay Off Your House
10 Min Read | Jan 14, 2022
I love taxes! Said no one ever.
Paying taxes is like taking a trip to the dentist—it's a part of life, but not a fun part. Property taxes are no exception.
Seasoned homeowners know property taxes are part of the deal. But it's easy for new home buyers to overlook how property taxes can affect their budget during all the excitement of buying a house.
Even if you remember to factor in these pesky little boogers, you've probably got some questions about them: How are property taxes paid? How often do you pay property taxes? When do you pay them? And are property taxes included in your mortgage payment?
Let's cut through some of the confusion about property taxes so you don't make a mistake that could cost you hundreds—or even thousands—of dollars!
What Are Property Taxes?
Property taxes are a yearly fee local governments collect to raise money for public services in the community.
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A good chunk of the money they collect from property taxes goes to your local police and fire departments, schools, and road maintenance. So when your local government (finally) sends someone to fix that pothole in your neighborhood, it could be your property tax dollars at work!
Do I Really Need to Pay Property Taxes?
Yes! Everyone who owns property has to pay property taxes. That includes homeowners. And if you own other types of property (like farmland you inherited from your parents or an investment property), you'll pay property taxes on those too.
But if you're renting someplace, like an apartment or an office space, you don't have to worry about property taxes. That's on your landlord!
How Are Property Taxes Paid?
Property tax is included in most mortgage payments (along with the principal, interest and homeowners insurance). So if you make your monthly mortgage payments on time, then you're probably already paying your property taxes!
Here's how you pay property taxes as part of your mortgage payment:
Let's say Jim and Pam decide to buy a home, and their mortgage lender estimates they'll owe $1,600 in property taxes each year.
Instead of letting Jim and Pam get smacked with a huge tax bill at the end of the year (triggering a mini panic attack), their lender will divide their total property tax amount by 12 months. Then they'll charge Jim and Pam that amount of their property taxes as part of their mortgage payment each month. Let's look at the math:
$1,600 ¸ 12 months = $133 per month
The lender sets that $133 a month aside in a separate account (often called an escrow account) and uses it to pay Jim and Pam's property taxes to the local government when they're due.
Just remember, the mortgage lender gives you estimates of what you owe in property tax, so you might get a refund or you might have to pay a little extra if the amount comes up short. Be prepared for either scenario!
Don't have a mortgage? How you pay property taxes will be a little different.
How Are Property Taxes Paid After I Pay Off My House?
There's nothing more freeing than making your final mortgage payment, walking out to the backyard of your completely paid-off home, and feeling the grass beneath your feet. It just feels different.
No more monthly house payments for you! But does that mean you're also finished with property taxes?
We hate to be the bearers of bad news, but you have to pay property taxes forever. (Okay, not forever. But for as long as you own the property. Even after it's paid for. We know—it stinks!)
The difference is how you pay your property taxes—and when you pay your property taxes.
Once you pay off your house, your property taxes aren't included in your mortgage anymore, because you don't have one. Now it's on you to pay property taxes directly to your local government.
How often you pay property taxes depends on where you live. Your local government may want you to pay your property taxes in a lump sum once a year. Or they may break it into smaller payments that are spaced a few months apart.
The exact day when you have to pay your property taxes also depends on where you live, so make sure you pay close attention to the due date on your property tax bill when it arrives in the mail!
And don't think you can just skip a payment here and there, either. If you get behind on paying your property taxes or you don't pay them at all, the local government can take your house and sell it to recoup the tax debt you owe them . . . and they can do that even though your house is completely paid for. Don't let it come to that!
The best way to handle property taxes on your own is to plan ahead.
First, calculate what you'll owe for each property tax bill and divide it by the number of months between bills. So if you owe property taxes once a year, divide the amount you owe by 12 months. If you pay twice a year, you'll divide the amount you owe by six months. And so on.
Then set that money aside in a sinking fund each month. That way, you won't have to dig under the sofa cushions to scrape up the money to pay those taxes when they're due.
How Do I Calculate What I Owe in Property Tax?
The amount you pay in property tax is based on two things: your local government's tax rate and your property's assessed value. All you have to do is take your home's assessed value and multiply it by the tax rate.
Assessed Value x Property Tax Rate = Property Tax
Let's say your home has an assessed value of $200,000. If your county tax rate is 1%, your property tax bill will come out to $2,000 per year. That's $167 per month if your property taxes are included in your mortgage or if you're saving up the money in a sinking fund.
Here's how to do that math, by the way:
$200,000 x 1% tax rate = $2,000 taxes owed
$2,000 / 12 months = $167 per month
Assessed Value
Here's a common mistake a lot of folks make: The assessed value is not the same as the price you paid for the house. It isn't how much you can sell the house for, either—that's called the "appraised" or "market" value.
Your local government's tax or property assessor sets the assessed value for your house, and it's usually lower than the market value. That's actually a good thing—because the amount you pay in property tax is based on that lower value!
Have no idea what the assessed value of your home is? Dig up your most recent tax bill or do a quick search of properties on your city or county tax assessor's website.
Property Tax Rate
Since local governments set property tax rates, the amount you pay depends on the county where you live. So the property tax rate for a condo in the heart of New York City won't be the same as the rate for a house just a few hours away in the suburbs of Syracuse.
To give you a general idea, homeowners in 2020 paid an average of $3,719 in property taxes at an average tax rate of 1.1%.1
Let's take a look at the top 10 highest and lowest average property tax rates around the nation:
| Highest Property Taxes | Lowest Property Taxes | ||
| State | Average Rate | State | Average Rate |
| New Jersey | 2.2% | Hawaii | 0.37% |
| Illinois | 2.18% | Alabama | 0.44% |
| Texas | 2.15% | West Virginia | 0.51% |
| Vermont | 1.97% | Colorado | 0.54% |
| Connecticut | 1.92% | Utah | 0.54% |
| New Hampshire | 1.86% | Tennessee | 0.59% |
| New York | 1.68% | Nevada | 0.6% |
| Pennsylvania | 1.64% | Idaho | 0.61% |
| Ohio | 1.62% | Arizona | 0.62% |
| Nebraska | 1.53% | Wyoming | 0.63%2 |
Now keep in mind, those are state averages. Each individual county in those states (and in every other state) has its own property tax rate that could be lower or higher than the state average.
It's also important to remember that property taxes aren't etched in stone. Tax hikes and property reassessments can change how much you owe from time to time, so make sure you stay up-to-date to prevent being blindsided by a higher tax bill!
How Much Is Too Much When You Pay Property Taxes?
When you're on the hunt for a new home, you're probably thinking more about how big the backyard is than how much you'll have to pay in property taxes. We get it—the backyard is way more fun to think about!
Still, if you forget to factor in property taxes, that backyard might not look so great when your first mortgage payment comes due!
At Ramsey, we'll always tell you to keep your monthly mortgage payment to no more than 25% of your take-home pay when buying a house. And that mortgage payment includes your property taxes. In other words, if those property taxes push your monthly payment above 25% of your income, you need to look elsewhere!
Let's go back to Jim and Pam. They bring home $6,000 per month, and they're looking to buy a home that fits within their budget. That means a maximum monthly payment of $1,500.
They find two houses they like in neighboring towns. Both houses cost $200,000 and have an assessed value of $160,000.
The only difference between the houses is that the property tax rate in one town is 1% while the rate in the other is 2%. You might be thinking, 1% isn't that big of a deal. Oh, but it is!
If Jim and Pam move to the town with the higher property tax rate, that 1% difference means they'll pay twice as much in property taxes. Here's how that works out:
| House A | House B | |
| Price (Appraised Value) | $200,000 | $200,000 |
| Assessed Value | $160,000 | $160,000 |
| Tax Rate | 1% | 2% |
| Annual Property Tax Total | $1,600 | $3,200 |
| Monthly Property Tax | $133 | $267 |
| Total Monthly Payment | $1,388 | $1,522 |
If they choose House B, they'll end up paying an extra $1,600 in property taxes each year. You can probably think of some things you'd rather do with that kind of money!
You can also see that the higher property taxes make their monthly mortgage payment higher. Their monthly mortgage payment in the town with the lower tax rate would be $1,388. That's under their $1,500 budget, so House A is a great choice. In the town with the 2% tax rate, their monthly payment rises to $1,522. That's over their budget—so House B is a no-go!
See how property taxes can become a budget buster? One way to make sure that doesn't happen is to work with a top-notch real estate professional who knows the local tax rates in your area. They can guide you toward a home that actually fits within your budget!
Have More Questions About Your Property Taxes?
Trying to understand how much you owe in property taxes can be tricky, especially since the numbers are different in every county. The good news is you don't have to figure it out on your own!
Our friends at Churchill Mortgage can give you a clear picture of how property taxes affect your monthly mortgage payments. And they can help you get a mortgage that will put you on the path to debt-free homeownership. That's one of the many reasons we call them RamseyTrusted—because we trust them to help you win with money and pay off your home! (Plus their great customer service doesn't hurt either.)
Reach out to our friends at Churchill Mortgage today!
About the author
Ramsey Solutions
Source: https://www.ramseysolutions.com/real-estate/property-tax
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