First Time Homebuyer Spotlight: Don’t Forget Property Taxes
This post first appeared in the October edition of Cirios Trends: Getting to the Bottom of the Housing Market
Property taxes should not be over-looked.
Most first time homebuyers don’t consider property taxes when looking for their first home. With all the excitement (and at times confusion) of buying a new home, it’s one of those details that can easily get lost in the shuffle. And while property taxes are a small fraction of the value of the home (less than 2% in most parts of CA), they are not insignificant when first time homebuyers are trying to determine if they can afford a home.
Let’s look at an example to get a better understanding of how property taxes work in California:
Purchase Price: $500,000
Down Payment: $100,000 (20%)
Monthly Mortgage Payment: $2,208.81 (5.25% interest rate, 30 year fixed rate loan)
Tax Rate: 1.2% (including city, county and state)
First Year Tax Bill: $500,000 x 1.2% = $6,000
Property taxes are paid twice per year in California, so that means you will have to make two payments of $3,000. However, most expenses when it comes to owning a home are broken down by month, which makes it easier to include the cost of home ownership in your monthly budget.
In our example, this buyer should allocate $500 per month ($6,000 / 12 months) for property taxes. $500 is not an insignificant amount, and could tip the scales for someone deciding whether to move from renting to buying, or in determining their price range for the home buying search.
In addition to just the expense, first time homebuyers should also understand the importance of paying property taxes on time. Failure to pay can result in a lien on your home which is the first item to be paid off when you sell your home — even before your mortgage. So: Pay your property taxes!
Back to our example, adding the monthly property tax expense to the mortgage payment, the total comes to $2,708.81. This represents a 22.6% increase in your monthly housing expense compared to your mortgage payment alone.
Unlike the fixed monthly payment of the mortgage in our example, property taxes typically increase every year.
Here is an example of what second year property taxes would be (in California, property taxes increase approximately 2% every year until you sell your home):
Purchase Price: $500,000
Annual tax increase: 2%
Year Two Tax Base: $500,000 x 1.02 = $510,000
Year Two Tax Bill: $510,000 x 1.2% = $6,120
Property taxes are more than just annoying. They can make a material difference in what a home buyer can afford. Buyers should also note that most mortgage calculators do not include property taxes in their estimations. Further, most lenders ignore property taxes when using your income to determine how big a loan you qualify for.
Always include property taxes when forecasting your monthly housing expenses — or you could end up with a surprise every six months.
Tags: Cirios real estate, first time home buyer, property taxes