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Assessment is a money term you need to understand. Here’s what it means.

What is an assessment?

An assessment establishes the value of an asset, such as a home or a vehicle, for taxation purposes. In some cases, an assessment is calculated to determine risk or the quality of a company’s asset management.

Deeper definition

The types of assessments include:

  •      Property value assessment: A taxing authority often assesses the value of a house every year to determine the amount of property taxes owed by the homeowner. In some cases, property values are assessed every two or three years instead of annually.
  •      Risk assessment: Investors must consider the risk-reward ratio of ventures before they invest, and this calls for a risk assessment. This type of assessment allows them to gauge the risk of a particular investment to determine its long-term worth. Banks also perform credit risk assessments on individuals and businesses applying for credit cards and loans.
  •     Asset condition assessment: This type of assessment determines the current condition of assets and tells a company how it could better manage its physical assets, such as buildings and equipment.

Assessment example

Property tax assessments are a reality for almost all homeowners, as they must pay property taxes even after paying off their mortgages. Every municipality, county and state has its own rules for calculating property taxes.

In general, if an individual buys a house valued at $200,000, and the assessed value increases to $210,000 the following year, this increase in assessment means the owner will pay higher property taxes. If the effective property tax rate is 2 percent both years, the owner would pay $4,200 in property taxes after the increase, as opposed to $4,000 in the year before the assessment increase.

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