What Goes Into Calculating Your Property Tax Bill?

If you own a home, you must pay property taxes on it. Here's how that number is calculated.

If you're a homeowner, you're well aware that your housing costs extend beyond your monthly mortgage payment to the lender. You also have to cover the cost of homeowners insurance, maintenance, repairs, and property taxes.

Property taxes are a tricky thing, though -- namely because they have the potential to rise from year to year, leaving you with higher housing costs to afford. Not sure why that happens? Here's the lowdown on property taxes.

How property taxes are calculated

The formula for calculating property taxes is a pretty simple one. You take your home's assessed value and multiply it by the tax rate that applies to your municipality. If your home is assessed at $400,000 and your local tax rate is 1.5%, that means your property tax bill for the year is $6,000.

Property taxes are generally due quarterly, though depending on how your mortgage is set up, you might effectively pay yours every month. Some home loans are set up so that borrowers pay more than just principal and interest on their mortgages every month. That excess money goes into an escrow account, and from there, your loan servicer dips into it to pay your property taxes and homeowners insurance for you.

It's important to understand what sort of mortgage setup you have. If there's no escrow, meaning you're only making a monthly payment of principal and interest on your home loan, then you'll need to budget for property taxes and pay them when they're due.

Why property taxes rise so often

Both of the factors that go into calculating property taxes can change from year to year, and as such, so can your tax bill. First, there's your home's assessed value. For the most part, this is the amount your town or city assessor thinks your home could sell for if you were to list it. If homes in your neighborhood start selling for higher prices than they used to, your property's assessed value can climb as well, resulting in a higher tax bill.

Your local tax rate could also change. Property taxes are used for a number of purposes, including funding school districts, providing town services, and supporting other public resources. If your town sees that its costs are rising, it may have to increase its tax rate.

What to do if your property tax bill keeps going up

Rising property taxes can constitute a financial strain, and the more frequently homes in your area are assessed, the more often your property tax bill might change. Some cities or counties assess homes once a year, which means you face a property tax hike annually. But remember, properties can also see their assessments drop from one year to the next, which could translate to a lower property tax bill.

If your bill keeps climbing, one thing you can do is appeal your property taxes. What you're actually doing when you go this route, though, is appealing your home's assessed value.

You can't argue your local tax rate because that's set by your local government. But if your home is assessed at $400,000 and you think it's only worth $360,000, you can file an appeal and see if that helps. If you win your appeal, you might lower your tax bill by virtue of reducing your home's assessed value by $40,000.

Proving your home is over-assessed isn't easy, though. You'll need to pull up home sale data in your neighborhood that points to homes that are comparable to yours being sold for less than your assessment. And if home values are up across the board, that can be difficult.

Calculating a property tax bill is pretty simple, and now that you know what goes into yours, you'll be better prepared to fight back if it keeps going nowhere but up.

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