Refinancing your mortgage can come with all kinds of financial benefits: the potential to lower your monthly payments, save on interest costs and access cash from the equity you’ve built in your home. There are plenty of questions to answer when thinking about refinancing, including whether refinancing will raise your property taxes. Here’s what to know.
Does refinancing affect property taxes?
If you’re concerned that refinancing your mortgage will lead to unwanted changes in your property taxes, you can rest easy: Refinancing will not actually increase your bill, at least directly.
If you’re doing a cash-out refinance, refinancing can impact your property taxes if you’re using those funds for a remodel. That’s because a construction project could trigger a reassessment.
It’s also important to understand that a new mortgage will come with new terms that can impact how you set aside cash from your budget for property taxes, says Lisa Greene-Lewis, CPA and tax expert at TurboTax.
“Homeowners need to consider whether the new loan will require them to impound their property taxes, meaning pay them every month with the loan payment or whether they will pay them twice a year outside of the loan,” Greene-Lewis says. “This is a consideration as it may depend on your finances and your stream of income. Some people prefer to pay their property taxes twice a year instead of having that bump out of their pocket every month.”
If you’re going with a new lender, though, that lender might have different escrow requirements altogether, and you might need to fund the escrow account in advance of the old lender refunding the balance. Some lenders don’t give borrowers the option to self-pay property taxes, either.
While you’ll be paying closing costs and handling a lot of paperwork in the midst of refinancing, there’s one piece of good news: You might still be able to take advantage of a property tax deduction when it’s time to file your income taxes, assuming you’re itemizing instead of taking the (higher) standard deduction.
“Whether your property taxes are impounded monthly or paid twice a year, you can still deduct up to $10,000 in total state and local property taxes,” Greene-Lewis says.
Factors that impact property taxes
So, what does impact your property tax bill? The most important factor is your home’s assessed value, which is not the same as the fair market value or appraised value. For one, assessors have their own methodology that differs from that of appraisers, and while your home will be appraised in the process of refinancing, the results of the appraisal are shared with your mortgage lender, not the local tax authority.
Let’s say your home’s assessed value on your most recent property tax bill was $368,000, while the appraised value is $430,000. Your property taxes would be calculated using the $368,000 figure. Then, your local tax authority will review other assessments in the area, along with the local annual budget, to set property tax rates, also known as mill rates. Even if your home assesses at a lower value, your taxes can still rise if the budget does.
Paying property taxes and other costs when refinancing
Refinancing will feel fairly similar to when you closed your first mortgage, and you might need to consider how to budget for property taxes and homeowners insurance in your closing costs this time around, too.
“Depending on when the loan closes, borrowers could be required to pay property taxes through escrow,” Greene-Lewis says.
This will vary based on where you live. For example, in Illinois, property taxes are typically due on June 1 and September 1. In Arizona, the due dates for installments are November 1 and March 1.
As you prepare to set aside money for your refinance closing costs, you’ll need to determine if your current lender has already made your property tax payment. Review your escrow transaction history to see if your lender has paid the bill, or ask the lender for proof of payment. You can also verify payment with your local tax authority. If you’re switching lenders, make sure the new lender has a record that your property taxes have been paid to avoid a larger-than-necessary set of closing costs.
For homeowners insurance, you’ll likely need to update your policy if the appraised value of your home has changed. If you’re refinancing your mortgage with a new lender, you’ll need to update your policy with that lender’s information.
Don’t be intimidated by all this work, though. Proactively call your insurance company to ask for any additional needs, and make sure that you’re responding to inquiries from the new lender and your insurance provider in a timely manner.
If you’re comparing refinance rates and see a deal that can help save you money, the new loan can be a smart financial decision. While you’ll want to consider how it impacts your personal finances — the amount of interest you’ll pay and your new monthly payments, for example — you generally don’t need to stress too much about any immediate impact on your property taxes.