A change in your home's tax assessment is both good news and bad news. If the assessment rises, it means that your property value has gone up -- but it also means your property taxes are likely to go up, too. If the assessment declines, your property taxes might fall -- but that's because your home might be worth less than before. In either case, the change will probably affect the amount of your monthly mortgage payment.
Tax assessments affect mortgage payments because most homeowners pay their property taxes "out of escrow." Each month, their mortgage payment includes an amount of money specifically designated for paying property taxes. Their mortgage company collects this money and holds it in a separate account -- called an escrow account -- until it's time to pay property taxes. When the taxes are due, the mortgage company pays them on behalf of the homeowner, using the money in the escrow account.
Your property assessment is the local government's estimate of what your house is worth. Your property taxes will be based on that assessed value. So when your assessment changes, it will in all likelihood change how much you owe in property taxes. Usually that means you'll be paying more, although it's hardly unheard-of for assessments to decline. If you're paying your property taxes out of escrow, that increase will eventually make its way to your monthly payment. Mortgage lenders typically review your escrow account once a year and adjust it for changes in your tax bill and your homeowners' insurance premiums, which many homeowners also pay out of escrow.
Taxes in Arrears
The change in your assessment might not produce an immediate increase in your property taxes, and therefore in your monthly mortgage payment. That's because in many states, property taxes are paid "in arrears" -- meaning, your taxes are paying for services already provided in the past, not those to be provided in the coming year. If the taxes in your area are paid in arrears, then this year's tax bill will be based not on your current assessment, but rather on the assessment that was in effect during the past period covered by the taxes you're about to pay. So a change in assessment won't change your taxes until next year or whenever it comes time to pay for this year's services in arrears.
If you don't pay property taxes out of escrow, then the new assessment won't affect your mortgage payment. A change in your property assessment will still change your taxes, but since your mortgage company isn't handling your tax bill, you won't see a change in your mortgage payment. Even if your home increases or decreases in value, the amount you actually owe on your mortgage doesn't change, so neither will your monthly payment.
- The Mortgage Professor: How Do I Figure Escrows?
- Department of Housing and Urban Development: FAQs About Escrow Accounts for Consumers
- Michigan Property Consultants LLC: Michigan Property Tax Prorations
- Internal Revenue Service. "4.48.6 Real Property Valuation Guidelines." Accessed April 10, 2020.
- State of New Jersey. "Property Tax." Accessed April 11, 2020.
- Internal Revenue Service. "Topic No. 151 Your Appeal Rights." Accessed April 11, 2020.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.