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- Refinancing a mortgage does not directly affect property taxes, but the terms of the new mortgage could impact how you pay them.
- The assessed value of your home, set by your local tax authority, is the biggest factor in determining your property tax bill.
- It’s important to consider the timing of your refinance in relation to when your property taxes are due, as you may need to settle them at closing.
- A cash-out refinance could indirectly impact your property tax bill, if you used the funds for substantial upgrades that makes your home value appreciate.
When you’re a homeowner, property taxes come with the territory, and several factors influence the amount you pay, including the rates set by your municipality and its assessed value of your home. Most of these are out of your control. But how about things you can control — like refinancing your mortgage? Can that too affect your annual property tax bill? After all, the two can be connected: a refinance does require a re-appraisal of your home’s worth, and property tax payments are often made as part of monthly mortgage repayments.
The good news is, you generally don’t need to stress about any immediate impact that refinancing could have on your property taxes. Here’s what to know.
How does refinancing a mortgage affect property taxes?
- A straightforward rate-and-term refinance, in which you simply swap your current mortgage for a same size loan, does not trigger any tax changes: Your property tax bill will not change.
- In contrast, a cash-out refinance — in which you take out a larger loan, receiving the difference in ready money — can potentially impact your property taxes, if you’re using the cash for a remodel or big renovation. That’s because a construction project that substantially alters or expands your home could trigger a reassessment.
A new mortgage could come with new terms — especially if it’s with a different lender — that can affect how you set aside cash from your budget for property taxes, says CPA Lisa Greene-Lewis, senior communications manager at Intuit, the financial technology platform that powers 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.
Factors that affect property taxes
So, if refinancing isn’t that significant, what sort of thing 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 for the refinance 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, and your municipality needs money.
Paying property taxes 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 requirement 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 October 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.
Next steps for refinancing your mortgage
If you’re considering refinancing a mortgage, shop around first and determine whether you’re able to find a deal that will lower your interest rate and save you money. Consider how long you intend to be in the home to ensure the hassle and expense would be worth it (Bankrate’s refinance calculator can determine how long it would take to reach your breakeven point). Finally, be sure to tote up all of the costs associated with refinancing.
Refinancing your mortgage won’t usually trigger a property tax reassessment since the appraisal for the lender isn’t shared with tax authorities. Property taxes are often updated annually by the local tax office, independent of refinancing activity. However, substantial home renovations that you covered via a cash-out refinance could prompt a reassessment — and a boost in your property tax bill — later on.
When refinancing close to your property tax due date, you might have to pay these taxes at closing, or immediately fund a new escrow account with the tax due. You can potentially deduct actual property tax payments made during the year on your next tax return, but funds placed in escrow for future taxes may not be deductible.