One of the carrying costs that come with homeownership is your property tax. Property taxes are charged by the municipality you live in, and are used to pay for services such as garbage and recycling collection, sewer protection, road and draining maintenance, snow removal, street lighting, policing, fire protection and more. How much you have to pay depends on the municipality you live in, as well as the value of the other properties around you. Here’s a quick look at how it works:
How are property taxes calculated?
Once a year, municipalities across the country assess and determine their property tax rate, which is usually somewhere in the range of 0.5 to 2.5%. Some people assume their annual property taxes are based on the size of their property, but that’s not exactly true. Your municipality’s property tax rate is multiplied by the market value of your home (not the purchase price), which can vary year-to-year based on the value of surrounding properties.
For example, if the market value of your home is $325,000 and your municipality’s property tax rate is 1.5%, your property taxes would be:
of home 1.50% property tax
So you would owe $4,875 in property taxes to your municipality that year.
How can I pay my property taxes?
Most lenders will give you the option to tack your property taxes onto your monthly mortgage payment. To do this, they simply take your annual property taxes and divide the total amount by how many mortgage payments you make each year. Using the example above, if you made 12 monthly mortgage payments each year, your lender could add $406.25 ($4,875 / 12) onto each of your payments. With this option, your lender then takes on the responsibility of paying your municipality.
Alternatively, you can also pay the municipality directly, by phone, mail, online or by setting up a pre-authorized payment plan.
What if the seller has prepaid their property taxes?
When you buy your home, your real estate lawyer will do the legwork to make sure all of the seller’s expenses are up-to-date, including their property taxes. If they are not, the seller will be required to pay them to the municipality. On the other hand, if the seller has prepaid their property taxes for the entire year, you’ll need to reimburse them a prorated amount, from your closing date to the day they’ve paid up until.
For example, if your closing date is 75 days before the end of the year, you’ll need to pay the seller the amount they’ve already paid for those 75 days. Using the same numbers from above, your calculation would look like this:
per year ÷ 365 days per year =
per day 75 days =
That amount would then be listed on your Statement of Adjustments, and must be paid for with cash on closing day.