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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. Here’s what to know.
How does refinancing a mortgage affect property taxes?
Refinancing your mortgage does not impact your property taxes. At least not directly.
However, it’s important to consider possible ramifications, depending on the type of refi you do. A straightforward rate-and-term refinance, in which you simply swap your current mortgage for a same size loan, does not trigger any tax implications. Meaning your property tax bill will not change. (Yes, the lender will probably order up a new home appraisal, but that won’t affect the property’s assessed value that’s already been set by the state—not for the current year, at least.)
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.
It’s also important to understand that a new mortgage could come with new terms that can affect 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 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 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.
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 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 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.
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. It’s also important to consider how long you intend to be in the home, before pursuing a mortgage refinance in order to ensure the expense you’re about to undertake is truly worth it. And finally, be sure you’re considering all of the costs associated with refinancing and the cost to obtain the new mortgage, before proceeding.
But the good news is, you generally don’t need to stress too much about any immediate impact that refinancing could have on your property taxes.
Additional reporting by Mia Taylor