Has Your Mortgage Payment Recently Gone UP?

Last week a good friend, neighbor, and client called me up to tell me that his property taxes have gone up yet again. I sold him his house in Firethorne three years ago, then subsequently built my own, four lots down the street, the next year. The last available lot on the block, and after meeting the neighbors, we knew we had to take it. Those of you with great neighbors will certainly understand.

"Help me figure out what's going on", he says. "Each year, my taxes have gone up little by little", he continues. After a poorly timed joke about government misappropriations, I continued on to tell him that there are really three factors that affect the amount of property taxes we owe at the end of each year. Tax rate, property valuation, and whether or not you have claimed a homestead exemption.

Most of us don't pay much attention to those factors because our property taxes are escrowed into our monthly mortgage note and we don't really know how much of that payment is being applied to taxes. That is until that Form 1098 rolls around in January, or the property tax statements show up in our mailboxes shortly thereafter. Let's take a look at how each of these factors contributes to your total tax bill.

Tax Rate

The effective tax rate that you pay as a homeowner is based largely on where you live. Each community, and even subsections within communities, will have it's own unique tax rate. That's because each community is subject to different taxing entities. For example - Firethorne is subject to taxation from the following entities: Katy ISD, Fort Bend MUD 151, Fort Bend County Drainage District, and Fort Bend County General Fund. Each entity sets it's own tax rate, and the sum total of those rates become your effective tax rate. In the case of Firethorne in 2012, that rate is 3.286%.

To understand how this rate is applied to the value of you home, you need to understand that the effective tax rate is applied to each $100 valuation. So in order to figure out how much property tax will be assessed on your home, you simply divide the valuation of your home by 100, then multiple the result by your effective tax rate. For example, if a house in Firethorne was valued at $300,000, with the tax rate above, the resulting tax liability would be $9,858 ($300,000 / 100 = $3,000 X 3.286 = $9,858).

Tax Rate Comparison

So it's easy to see how a lower tax rate lowers your tax liability. As recently as 2006, Katy ISD's tax rate alone was capped at the state maximum of $2.00. It's been lowered to $1.526. That change alone on the above example equates to $1,420 that the homeowner now gets to keep. Moral of this story? Know your taxing entities and their rates, and do what you can to help keep their rates in check.

Property Valuation

Each year, your county appraisal district will utilize comparable sales and apply generally accepted mass appraisal techniques to estimate a value for your property. Because of the number of properties they are tasked with, performing detailed analysis of each home is a practical impossibility. They do, for the most part, get fairly close on valuations - usually within 10% of market value. Which is why knowing your CAD valuation as well as the true market value for your home is extremely important. There's an old saying in real estate - "The only time you want your home to appraise high is when you're ready to sell it."

Back to my friend from the beginning of this story. Since tax rates have remained stable for the last three years, I knew the problem has to be with his valuation. My next step was to pull his tax records from the county appraisal district which confirmed what I thought - his valuations had gone through the roof! At this point, most homeowners start calling the CAD offices to complain, but it's important to know that they have procedures on how to handle contesting valuations. It begins with doing your homework.

Since my friend is also a client, he calls me for advise on handling all things real estate related. I pulled comparable listings and sales within the neighborhood from the MLS, searching for similar homes either active on the market or sold within the last six months. Since we're currently in a rabid seller's market, I lowered that range to the last three months and was able to narrow the list to three active listings and three recently sold listings. The results confirmed what I had suspected. Home values had gone up 10% in the last year.

Homestead Exemption

If you purchased a home last year and occupied it as your primary residence by January 1, and you aren't currently claiming homestead on a different property, you are eligible to lower your property taxes through filing for your homestead exemption in the county where the property is located.

Here's how it works: The taxing authorities (school district and county) allow homeowners to remove part of the taxable value of their home for tax purposes since it's being used as a primary residence. For example, if a property is valued at $100,000 and qualifies for a $15,000 exemption, taxes would be paid on just $85,000 therefore reducing the total tax liability. The deadline to file is between January 1 and April 30th of each year. You cannot file early and if you miss the deadline, you have to wait until the following year to file.

Homestead Exemption Comparison

So What Happened?

So after all my research and reviewing the comparables with my friend, we determined that the actual market value of his home had indeed gone up considerably, but not by as much as the appraisal district thought. The difference between their valuation and mine equated to roughly $15,000 - or roughly $500 less taxes that he should owe. He'll be contesting his valuation come May 1st. I strongly advise all of my clients to review their valuations every year and contest their valuations when appropriate.

Your BEST defense against growing property valuations is a good relationship with a professional Realtor® who is willing to provide you with a good, comprehensive comparative market report. That report gives you the ammunition to confidently protest your valuation in front of the appraisal review board. Information about HOW to protest your valuation is outside the scope of this article, but WILL be included with your valuation when it arrives in the mail.

How Can We Help You?

If your payments are going up, or you've noticed rising tax valuations, let us help you verify that they're correct. If you would like a no-cost review and comparative market analysis for your home, please contact us with the information at the top of this page.