Buying a home means doing more than just taking on the expense of a monthly mortgage payment. It also means having to manage other costs, like property taxes.
Here’s the tricky thing about property taxes. Your mortgage payment is set in stone (unless you have an adjustable-rate mortgage), but your property tax bill can change from year to year. And since home values soared in 2020, property taxes followed suit.
The average property tax bill for a single-family home was $3,719 last year, according to ATTOM Data Solutions. That translates to an effective property tax rate of 1.1% for 2020.
What’s interesting is that this tax rate actually represents a drop from the average 1.14% tax rate in 2019. The reason the average property tax bill went up is that home values rose, and property taxes are calculated by taking a home’s assessed value and multiplying it by its local tax rate.
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Are your property taxes manageable?
In some parts of the country, a $3,719 tax bill is a bargain. Take New Jersey, for example, which has the highest tax rates in the country at 2.2%. The average tax bill there in 2020 was $9,196. On the other hand, in Mississippi, the average tax bill came in at just $1,241. That figure is a reflection of home values as well as local tax rates.
But whether your property taxes went up, went down, or stayed the same in 2020, if you’re having a hard time managing them, you have some options. First, you can try appealing your taxes. The appeals process varies from place to place, but you’ll generally need to come up with proof that your home is being assessed at a higher price than its actual value. (As a point of clarity, when we talk about appealing property taxes, what you’re actually doing is appealing your assessment — you can’t argue the tax rate your municipality imposes.)
If appealing your taxes doesn’t work, you can look at refinancing your mortgage. If you can lock in a lower interest rate on your loan, your monthly payments could get a nice reduction. The money you save each month could then be used to pay your property taxes.
And lastly, you can always revert to the age-old “cut back on spending” tactic to free up more money for your property taxes. If your bill recently went up, comb through your budget to see how you might make up the difference.
Do your property taxes give you a tax break?
Property taxes are a drag, but if you itemize on your tax return, the good news is that you’re allowed to deduct them as part of the SALT (state and local tax) deduction. The bad news is that this deduction is capped at $10,000, and it covers both your property taxes and your state income taxes. Consider New Jersey’s average $9,196 tax bill. The state also has a high tax rate, so many residents are limited to a $10,000 deduction when the sum of their property tax bill and their income tax is much higher.
Property taxes are part of the territory when you buy a home, and unfortunately, they have the potential to go up. Aim to leave some wiggle room in your budget for that possibility. In fact, it’s a good idea not to buy a home at the absolute top end of your budget for this reason. The last thing you want to do is take on a home you can no longer afford once its property tax bill increases on you.
View more information: https://www.fool.com/the-ascent/mortgages/articles/this-was-the-average-property-tax-bill-in-2020-how-does-yours-compare/