Routing # 256078446
MORTGAGE KNOWLEDGE CENTER
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MORTGAGE
Property Taxes 101 for First-Time Buyers
What You'll Learn: What property taxes are, how they factor into closing costs and more.
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EXPECTED READ TIME: 5 MINUTES
December 18, 2023
As a new homeowner, you’ll have a lot of new responsibilities. Renovations, home upkeep, monthly mortgage payments, and property taxes. First-time buyers may not be tracking their property taxes at closing, but it’s important to understand what they are and how they’re calculated. That way, you’re prepared when the time comes to seal the deal on your new home.
Read on to learn everything you need to know about property taxes for your new home.
What is property tax?
In short, property taxes are the fees paid to the state, local municipalities, and various government authorities that are used to fund schools, road upkeep, water/sewer line maintenance, plus other municipal services in the area. The exact total of these taxes, and who you will pay, will vary depending on the location you choose to live in, the assessed value of your property, and when you close on the home.
For example, let’s say you purchase a home assessed at $100,000 that is subject to a 2.5% tax rate. That means you would pay a total of $2,500 in property taxes each year.
Property tax payments may be due monthly, quarterly, bi-annually, or annually. They are often paid through mortgage escrow accounts, which are set up to collect payments monthly along with your mortgage payment. The mortgage company then pays the taxes on the homeowner’s behalf as they are due.
What is the difference between property taxes and real estate taxes?
The terms property tax and real estate tax are often used interchangeably. Technically, ‘property taxes’ can be used to describe taxes on types of property beyond homes and land (i.e. cars, boats, etc…), while real estate taxes refer specifically to real estate properties.
Will I have pay property taxes at closing?
There are a lot of fees buyers shoulder when a home sale closes. This includes property taxes, which are normally included in the closing costs.
Typically, it falls on both the buyer and the seller to pay property taxes at the time of closing. The seller usually pays a prorated amount for the time they’ve lived in the home since the beginning of that tax year. Likewise, the buyer pays their own prorated amount of the property taxes to cover the rest of that calendar tax year.
How much are property taxes at closing?
If both the seller and buyer are responsible for paying a portion of the year’s total property tax, the exact cost to each party will be based on the closing date and the amount of total taxes due. This is why the timing of when you close on a home matters.
Continuing with the example above, let’s say you close on June 27 and the total annual property tax amount is $2,500. Here’s how to calculate the total cost of property taxes for the seller and buyer at closing:
- Divide the total annual amount by 12 months to calculate the monthly payment: $2,500 /12 = $208.33
- Then divide the monthly payment by 30: $208.33 /30 = $6.94 per day on a 30-day calendar
- In this case, the seller is responsible for 6 months and 26 days of the year’s property tax:
6 X $208.33 = $1,249.98
$6.94 X 26 = $180.44
$1,249.98 + $180.44 = $1,430.42 is the approximate total amount due from the seller.
Using the same calculations, you can determine the buyer’s total amount due: - The buyer is responsible for 5 months and 4 days:
5 X $208.33 = $1,041.65
4 X $6.94 = $27.76
$1,041.65 + $27.76 = $1,069.41 is the approximate total amount the buyer will cover.
Doing the actual math for your new home’s closing costs is typically the responsibility of your lender. They’ll provide you with information on the amount of cash due at closing that will take all of these numbers into account. But it’s helpful to understand how the math works so you can keep an eye out for any discrepancies when reviewing the paperwork.
First-time home buyer deductibles and tax credits
The IRS offers a property tax deduction. Homeowners may be able to deduct local property taxes from their federal income taxes, but there are limitations that include a cap to how much can be deducted. Real estate taxes are deductible in the year they’re paid, not the year they’re assessed. This means, if you’re a new homebuyer you will typically have to wait until the next tax year. It’s also a good idea to consider consulting a tax advisor for more insight.
Currently, there is no first-time buyer tax credit available at the federal level but that doesn’t mean there aren’t options available in your state. States sometimes offer their own assistance programs to help residents achieve homeownership. It’s worth researching what may be available in the area you’re moving to. The U.S. Department of Housing and Urban Development (HUD) offers a directory of local home buying programs by state.
SIMILAR ARTICLES
Mortgages 101: What First-Time Homebuyers Need to Know
Overview of mortgage terminology that first-time homebuyers will come across when buying their first home. It's important to understand the terminology used so buyers can better understand their mortgage.
10 Things New Homebuyers Need to Know
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What Is a Closing Disclosure?
A closing disclosure is an important document you'll receive three days before you close your loan. Understanding how to read it will help you double-check the specifics of your mortgage.
Can I Afford to Buy A Home?
Find out if you're financially ready to buy a home. Use our affordability calculator to list your current income and bills and determine how much home you could afford.
Home Buying Steps
Mortgage Products
Disclosures
1Conventional Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
2FHA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 96.5%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
3VA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.125 discount point, which equals 1.125 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $450,000; loan-to-value ratio of 95%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of $995.
4Jumbo Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 0.625 discount point, which equals 0.625 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, non-conforming, fixed-rate loan. Loan amount of $1,009,000; loan-to-value ratio of 70%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.
Routing #256078446
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