How Property Taxes Affect Your Mortgage Payment

When people estimate a mortgage payment, they often focus on principal and interest. But in California, property taxes can add a substantial amount to the monthly payment, and they vary more from home to home than many buyers expect.

How California property taxes work

Under Proposition 13, the base property tax rate is generally 1% of the property's assessed value. When you buy a home, the assessed value is typically reset to the purchase price. After that, the assessed value can generally increase by no more than 2% per year, unless there's a change in ownership or new construction.

But 1% isn't the whole story.

Additional assessments

Most properties have additional charges on top of the base rate, such as:

• Voter-approved bonds for schools, parks or infrastructure
• Special assessments for services like lighting or landscaping
• Mello-Roos (Community Facilities District) taxes, common in newer developments, which fund infrastructure like roads and schools

Because of these, the total effective tax rate in many areas is above 1%. In some newer communities with Mello-Roos, it can be meaningfully higher. The amount and duration of Mello-Roos vary by district.

Your agent can usually help you find a property's tax bill and any special assessments. Ask before you write an offer.

Supplemental tax bills

This catches many new buyers off guard. When you buy, the county reassesses the property at your purchase price. It then sends a supplemental tax bill for the difference between the old and new assessed values for the rest of the tax year.

Supplemental bills usually go directly to you, not your lender, even if you have an impound account. Set money aside for it.

How taxes fit into your payment

Lenders include property taxes in your housing payment when calculating your debt-to-income ratio. Many loans also use an impound (escrow) account:

• Each month, part of your payment goes into the account.
• The servicer pays your property taxes and insurance when they're due.
• At closing, you'll make an initial deposit into the account as part of closing costs.

Some conventional loans allow you to waive impounds and pay taxes directly, sometimes with a pricing adjustment. Many government loans require impounds.

Annual escrow analysis

Each year, the servicer reviews your impound account. If taxes or insurance went up, your payment may increase. If there was a surplus, you might receive a refund.

An example

These numbers are for illustration only. Two homes are both priced at $900,000.

• Home A has a total tax rate of about 1.1%, or roughly $9,900 a year, about $825 a month.
• Home B is in a newer community with Mello-Roos, bringing the total rate to about 1.6%, or $14,400 a year, about $1,200 a month.

That's a $375 monthly difference with the same purchase price and the same loan. It could change which home fits your budget.

Tips

• Always check the actual tax rate and assessments for each property.
• Ask whether Mello-Roos applies and when it ends.
• Budget for a supplemental tax bill after closing.
• Use the mortgage calculator with the property's actual tax rate.
• Property tax deductions have limits; ask a tax professional how they apply to you.

Questions?

If you're comparing homes with different tax situations, I'm happy to run the payments side by side. contact me, or start your pre-approval.