There’s a reason so many buyers struggled to buy a home last year, despite record-low mortgage rates. Home values skyrocketed on a national level, putting properties out of reach for a lot of prospective buyers.
Higher home values may seem like a good thing, in theory, for the people who own those properties. After all, the more a home is worth, the more equity its owner is likely to have. (Equity is the portion of a home that an owner owns outright, and you can borrow against your equity as needed.)
But there’s one drawback to rising home values: They have the potential to cause property taxes to increase. Such was the case last year, and many homeowners are now stuck with higher tax bills.
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An unwanted consequence
Property taxes are calculated by taking the assessed value (which is usually the market value) of a home and multiplying it by whatever local tax rate applies. Tax rates vary depending where you live.
The problem with rising home values is that they can cause assessments to increase, thereby driving up property tax bills. Imagine a home is assessed at $400,000 and its local tax rate is 2%. That means the home in question costs $8,000 a year in property taxes. If that home is reassessed at $450,000, its bill will climb to $9,000 due to that uptick in value.
That’s precisely what’s hit a lot of homeowners recently. The average property tax bill for a single-family home rose from $3,561 in 2019 to $3,719 in 2020, according to ATTOM Data Solutions. All told, property taxes for single-family homes increased $323 billion last year, or 5.4%, from the year before.
Unsurprisingly, homeowners in states with higher property taxes felt the pain the most. In New Jersey, for example, which has the highest property tax rates in the country, the average property tax bill for a single-family home rose to $9,196 in 2020.
Fighting back against rising property taxes
Homeowners whose property taxes go up have the option to appeal them. Once a year, property assessments are sent out, and from there, owners can argue that their homes are overvalued through whatever local process is in place. In some jurisdictions, that means mailing in an appeal form. In other cases, it means having to stand before a judge and argue why a home is overassessed.
If a judgment is entered in favor of a homeowner so that the property’s assessed value is lowered, the property tax bill for that home will decrease. But in today’s housing market, arguing that homes are assessed too high isn’t easy. So homeowners across the nation may end up with higher property tax bills until the housing market cools off and their houses are then assessed at a lower value.
It’s for this reason that homeowners are advised not to max out their budgets when purchasing property. Although it’s possible to lock in the same monthly mortgage payment for up to 30 years so that there are no surprises, other costs of homeownership, like property taxes, have the potential to rise. Buyers must leave themselves wiggle room for those unplanned expenses so they’re not left scrambling to cover their bills.
View more information: https://www.fool.com/the-ascent/mortgages/articles/home-values-soared-in-2020-but-so-did-property-taxes/