Property taxes can significantly affect home loans

Property taxes, unlike loan principal, cannot be deferred

The market for real estate continues to boom, and everyone who can get their hands on some money is trying to invest in real estate. It’s considered a better, safer investment than stocks, since real estate values aren’t likely to become worthless overnight. The huge influx of investment cash into real estate has raised prices to previously unimagined levels, making it harder than ever for the average working American to buy a home. The lending industry is aware of this and has introduced dozens of new types of loans in recent years that are designed to keep payments as low as possible. Unfortunately, these loans can’t minimize property taxes.

These loan types include all kinds of adjustable rate mortgages, including the always-dangerous Option ARM, as well as loans with greater flexibility regarding down payments and amortization schedules. By keeping the costs of these loans to a bare minimum, the payments are lower, and more consumers can afford larger, more expensive houses. One component of the mortgage payment that is often overlooked has been increasing along with the price of housing, and it may soon have a dramatic effect on the market - property taxes.

Property taxes are a necessary evil in our society, as they pay for all manner of necessary services. While it isn’t always necessary to do so, most homeowners pay their taxes through an escrow account that adds the money to their house payments. The homeowner just writes one check that includes the loan principal, interest, property tax and private mortgage insurance, if necessary. Few home buyer realize just how large that property tax component can be.

In some markets, such as California or South Florida, property taxes can be huge. A median priced home in the Miami area might require taxes of nearly $10,000 per year. For a homeowner who has already paid off his or her mortgage, this amount comes to more than $800 per month, which in many markets would constitute a house payment by itself. California rolled back assessments in 1978 with the passage of Proposition 13, which based the revenue on sales prices rather than assessed values. But as houses change hands quickly at ever-increasing prices, the taxes go up, too.

While there are mortgages that can keep house payments low and some that temporarily require no payment of principal. the taxes are always due and can’t be minimized. They are necessary for roads, fire departments, and schools. With taxes tied to home values, many buyers are discovering that they cannot afford to live in certain neighborhoods that would seemingly be affordable. Others, who fail to do research, are encountering “sticker shock” once the bill comes due. If you are struggling to pay a $2200 house payment, an additional $800 per month in assessments could be crushing.

Many states have enacted reforms similar to California’s, but municipal services, and the means to pay for them, will always be required. Recommendations for buyers include comparing different communities to find one with the lowest taxes (adjacent counties to urban areas are often a good choice) and making sure that the value of the home is assessed carefully.