30
May
By Mike Pfefferman
Home Buying Tips

What Every Homebuyer Should Know About How Are Property Taxes Calculated

When buying a home, it’s easy to focus on the down payment and mortgage rate, but don’t overlook property taxes. They can significantly affect your monthly payment and long-term budget and understanding how they’re calculated is key to making smart homebuying decisions.

We will break down the basics and highlight a few often-missed factors that could influence how much you’ll pay.

The Property Tax Formula
Property taxes are calculated based on the assessed value of your property multiplied by your local tax rate:

Assessed Value × Local Tax Rate = Annual Property Tax

The assessed value is determined by your local taxing authority and can be reassessed yearly or every few years depending on your location. This value isn’t always the same as your purchase price, it may be a percentage of market value or a figure set by recent local data.

Land Value vs. Structure Value
Most taxing authorities separate your property into two parts: the land and the improvements (like your home and any buildings). This matters because in many high-demand areas, land value can increase faster than the structure itself, even if no renovations have been made.

For example, if your home is in an area experiencing rapid growth or development, the land alone may account for a large portion of your tax bill. This is especially true for lots near commercial zones or in neighborhoods targeted for redevelopment.

“Highest and Best Use” Assessments
One often-overlooked factor in property taxes is the concept of “highest and best use.” This means your property may be taxed based on what it could be used for, not just what it is now.

For instance, a small home located in an area zoned for commercial or multi-family use might be assessed at a higher value because the land could potentially be redeveloped into something more profitable. Even if you have no intention of changing it, the possibility alone can drive up your assessed value and tax bill.

Tax Rates Vary by Location
Tax rates are typically set by a combination of city, county, and school district levies. Some states or counties reassess annually, while others only do so when a property is sold. Local laws may also include homestead exemptions, tax caps, or freezes that can help primary homeowners reduce or stabilize their tax bills.
Because these rules vary so widely, it’s essential to research how property taxes are assessed in the area where you’re planning to buy.

What Homebuyers Should Do
Before you commit to a property, be sure to:

  • Review recent and projected property tax bills
  • Understand how land and structures are valued locally
  • Ask if the area uses “highest and best use” in assessments
  • Factor in future tax increases based on development trends

Consult with a mortgage professional — they are a core part of homeownership costs. By doing your homework and asking the right questions, you can avoid surprises and budget confidently for your next move.

25
Oct
By Mike Pfefferman
Mortgage Rates

What Is A Mortgage Par Rate And How Does It Work

Think of the par rate as the raw, default rate offered by a lender. It’s not the lowest rate you can get, nor is it inflated by any adjustments. Lenders determine the par rate based on a variety of factors, such as current market conditions, your credit score, the loan type, and the loan amount.

Discount Points: Lowering Your Rate

When you’re negotiating your mortgage, you can choose to buy “discount points” to lower the interest rate below the par rate. Each discount point typically costs 1% of the loan amount and can lower your interest rate by a fraction of a percentage point. For example, if the par rate is 5%, purchasing one discount point might reduce your rate to 4.75%.

While paying for discount points increases your upfront costs at closing, it can save you money over the long term. If you plan to stay in your home for several years, buying down your rate could reduce your monthly payments and save you thousands of dollars over the life of the loan.

Lender Credits: Increasing Your Rate to Reduce Costs

On the other hand, lenders may offer something called “lender credits.” Lender credits are essentially the opposite of discount points. Instead of paying a fee to lower your rate, you accept a higher interest rate than the par rate in exchange for credits that reduce your upfront costs, like closing fees.

For example, if the par rate is 5%, you might accept a 5.25% rate, and in return, the lender gives you a credit that could cover some or all of your closing costs. This option can be attractive if you’re short on cash for closing or would prefer to minimize your out-of-pocket expenses.

However, the downside to accepting lender credits is that you’ll pay more in interest over the life of the loan. The higher interest rate will lead to higher monthly payments and increased overall loan costs, which may outweigh the short-term benefits of lower closing costs.

How Is Your Par Rate Determined?

Several factors influence what par rate you qualify for:

  • Credit Score: Lenders view borrowers with higher credit scores as lower risk. The better your credit, the more likely you are to receive a favorable par rate.
  • Loan Type: Different types of loans (fixed-rate, adjustable-rate, FHA, VA, etc.) will have varying par rates.
  • Loan Term: A 15-year loan typically offers a lower par rate than a 30-year loan.
  • Market Conditions: Interest rates fluctuate depending on the overall economy and housing market trends. Lenders adjust par rates based on these factors.

It’s important to compare the par rates from different lenders and consider how buying points or taking credits could affect your overall loan costs. A par rate isn’t necessarily the rate you should settle for, but it gives you a clear starting point for negotiations.

Making the Right Decision for You

Ultimately, the decision to accept the par rate, buy down the rate with discount points, or increase the rate in exchange for lender credits depends on your financial situation and long-term plans. If you plan to stay in your home for a long time, paying for discount points might be worth the upfront cost. Conversely, if you’re looking for lower upfront expenses, opting for lender credits could make sense, especially if you plan to refinance or sell the home within a few years.

Understanding the mortgage par rate and how it works is crucial when shopping for a home loan. Whether you choose to stick with the par rate, buy it down, or increase it for short-term savings, being informed will empower you to make decisions that benefit your financial future.