Property Taxes: What First-Time Buyers Need to Know

Property taxes are part of your monthly payment, but many first-time buyers do not understand how they work — or that they can increase significantly after you buy.

Your local government assesses the value of your property and multiplies it by the local tax rate. Rates vary widely by location, so check the local rate before assuming. For example, a $300,000 home at a 1.5% rate owes $4,500 per year, or $375 per month added to your payment. In California, Proposition 13 sets the base rate at 1% of assessed value, plus voter-approved bonds and local special taxes or assessments, such as Mello-Roos, so the total is often above 1%.

Many places reassess a home when it sells, so the seller's tax amount on the listing can be misleading. In California, a sale resets the assessed value to your purchase price; after that it can rise no more than 2% a year until the next sale or new construction. California also sends a supplemental tax bill after you buy, covering the higher value for the rest of the tax year. It comes to you, and escrow usually does not pay it, so set money aside. File for the homeowners' exemption, which takes $7,000 off the assessed value of the home you live in as your primary residence.

Many loans collect property taxes through an escrow account (an impound account in California). The servicer estimates your annual taxes and insurance, divides by 12, and adds that to your monthly payment. If taxes or premiums rise, your payment rises too — even though your rate is locked. This is a common reason a "fixed-rate" payment goes up.

• ✓Property tax rates vary significantly by location — check before you buy
• ✓In California, a purchase resets the assessed value to your price, and a supplemental tax bill follows that escrow usually does not pay
• ✓Your "fixed-rate" monthly payment can still rise if taxes or insurance increase
• ✓The listing's tax amount may not reflect what you will pay