Does refinancing affect property taxes?
Refinancing your mortgage can come with all kinds of financial benefits: the ability to lower your monthly payments, save on interest costs, and access cash through the equity in your home. . There are many questions to answer when considering refinancing, including whether refinancing will increase your property taxes. Here’s what you need to know.
Does refinancing affect property taxes?
If you’re worried that refinancing your mortgage will cause unwanted changes to your property taxes, you can rest easy: refinancing won’t actually increase your bill, at least not directly.
If you are doing a cash-in refinance, the refinance may impact your property taxes if you use those funds for a renovation. This is because a construction project could trigger a reassessment.
It’s also important to understand that a new mortgage will come with new terms that can affect how you set aside money from your budget for property taxes, says Lisa Greene-Lewis, CPA and expert. in taxation at TurboTax.
“Homeowners need to consider whether the new loan will require them to garnish their property taxes, i.e. pay them monthly with the loan repayment or whether they will pay them twice a year outside of the loan. “, says Greene-Lewis. “This is a consideration as it may depend on your finances and income stream. Some people prefer to pay their property taxes twice a year instead of having that bump out of their pocket every month.
If you go with a new lender, however, that lender may have completely different escrow requirements, and you may need to fund the escrow account before the old lender pays off the balance. Some lenders also do not offer borrowers the option of paying property taxes themselves.
Although you’ll pay closing costs and deal with a lot of paperwork in the middle of refinancing, there’s good news: you may still be able to take advantage of a property tax deduction when you file your tax return, assuming you itemize instead of taking the (higher) standard deduction.
“Whether your property taxes are entered monthly or paid semi-annually, you can still deduct up to $10,000 in state and local property taxes,” says Greene-Lewis.
Factors that affect property taxes
So what impacts your property tax bill? The most important factor is the assessed value of your home, which is not the same as fair market value or appraised value. For one thing, appraisers have their own methodology that differs from appraisers, and while your home will be appraised as part of the refinance process, the appraisal results are shared with your mortgage lender, not the lender. local tax administration.
Let’s say the assessed value of your home on your last property tax bill was $368,000, while the appraised value is $430,000. Your property taxes would be calculated using the figure of $368,000. Then your local taxing authority will look at other assessments in the area, as well as the local annual budget, to set property tax rates, also known as mill rates. Even if your home is assessed at a lower value, your taxes can still go up if the budget does.
Pay property taxes and other fees when refinancing
Refinancing will be quite similar to when you closed your first mortgage, and you may need to think about how to budget property taxes and homeowners insurance into your closing costs this time around as well.
“Depending on the loan closing date, borrowers may be required to pay property taxes through an escrow,” Greene-Lewis says.
This will vary depending on where you live. For example, in Illinois, property taxes are generally due on June 1 and September 1. In Arizona, the payment due dates are November 1 and March 1.
As you prepare to set aside money for your refinance closing costs, you’ll need to determine if your current lender has already paid your property taxes. Review your escrow transaction history to see if your lender paid the bill, or ask the lender for proof of payment. You can also check the payment with your local tax authority. If you change lenders, make sure the new lender has a record that your property taxes have been paid to avoid a bigger than necessary set of closing costs.
For home insurance, you will likely need to update your policy if the appraised value of your home has changed. If you refinance your mortgage with a new lender, you will need to update your policy with that lender’s information.
Don’t be intimidated by all that work, though. Proactively call your insurance company to request additional requirements and be sure to respond to inquiries from the new lender and your insurance provider in a timely manner.
At the end of the line
If you compare refinance rates and see a deal that can help you save money, the new loan may be a smart financial decision. Although you want to consider its impact on your personal finances – the amount of interest you’ll pay and your new monthly payments, for example – you generally don’t need to worry too much about the immediate impact on your property taxes. .