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A variety of factors affect the amount of property taxes a homeowner pays, including the tax rates set by your local government and the assessed value of your home. Most of these factors are outside of your control. But what about the things you can control, like refinancing your mortgage? Will this also affect your annual property tax bill? Luckily, you usually don’t have to worry about the immediate impact refinancing will have on your property taxes. Here’s what you need to know.
How does refinancing a mortgage affect property taxes?
Refinancing your mortgage doesn’t affect your property taxes, at least not directly. However, it’s important to consider the possible impacts depending on the type of refinance.
- A simple rate and term refinance, where you simply exchange your current mortgage for a loan of the same size, will not result in a change in taxes, meaning your property tax bill will remain the same.
- In contrast, a cash-out refinance (taking out a larger loan and receiving the difference in cash) can affect your property taxes if you use the cash for renovations or major improvements. This is because construction projects that significantly change or expand your home can trigger a reassessment.
A new mortgage could come with new terms, especially if it comes from a different lender, which could affect how you set aside cash from your budget for property taxes, says Lisa Greene Lewis, a CPA and senior communications manager at Intuit, the financial technology platform that powers TurboTax.
“Homeowners should consider whether their new loan requires them to have their property taxes carried forward, i.e., paid monthly along with their mortgage payment, or paid twice a year separately from their mortgage,” Green-Lewis says. “This is something to consider, as it can vary based on your financial situation and source of income. Some people prefer to pay their property taxes twice a year, rather than paying taxes out of pocket each month.”
However, if you choose a new lender, that lender may have different escrow requirements and may need to deposit funds into an escrow account before your previous lender will refund your balance. Some lenders do not give borrowers the option to pay their own property taxes.
When you refinance, you’ll pay closing costs and deal with a ton of paperwork, but there’s good news: If you claim itemized deductions instead of the standard deduction, you may be able to take advantage of the property tax deduction when you file your income tax return. You can deduct up to $10,000 in combined state and local property taxes, whether your property taxes are withheld monthly or paid twice a year.
Paying property taxes when refinancing
Refinancing will feel much the same as paying off your first mortgage, and this time you may have to consider how to budget for property taxes and homeowners insurance as closing costs.
“Depending on when the loan closes, the borrower may be required to pay property taxes through escrow,” Green-Lewis said.
This requirement varies depending on where you live. For example, in Illinois, property taxes are usually due on June 1 and September 1. In Arizona, installments are due on October 1 and March 1.
As you prepare to set aside funds for your refinance settlement costs, you should find out if your current lender has already paid your property taxes. Check your escrow transaction history to see if your lender has paid your invoice, or ask your lender for proof of payment.
You can also verify your payments with your local tax office. If you’re changing lenders, make sure your new lender has records of your property taxes paid to avoid incurring higher closing costs than necessary.
For homeowners insurance, you may need to update your policy if the appraised value of your home changes. If you refinance your mortgage with a new lender, you’ll need to update your policy with that lender’s information.
Don’t let this intimidate you, however: be proactive in reaching out to your insurer if you have additional needs and be responsive to inquiries from new lenders and insurers.
Factors affecting property taxes
The most important factor that affects property taxes is the assessed value of your home, which is different from fair market value or appraised value. First, assessors have their own methodology that is different from appraisers, and although homes undergo refinance appraisals, the appraisal results are shared with your mortgage lender, not your local taxing agency.
Let’s say your home was assessed at $368,000 on your most recent property tax bill, but your refinanced assessed value is $430,000. Your property taxes are calculated using the $368,000 figure. Local tax officials then look at other assessments in the area and the local annual budget to set your property tax rate (also called the mill rate). Even if your home is assessed at a lower value, your taxes could go up if the budget increases and your local government needs funds.
Next steps in refinancing your mortgage
If you’re considering refinancing your mortgage, shop around first to see if there are any deals that can lower your interest rate and save you money. Consider how long you plan to live in the home to see if it’s worth the hassle and expense (Bankrate’s refinance calculator can help you figure out how long it will take you to break even). Finally, be sure to add up all the costs associated with refinancing.
