Buying a newly built home is an awesome experience. You can pick out colors, fixtures, finishes, floorings and the list goes on. But there is one major thing you must be pay attention to and that is the real estate taxes of the home. Here are a couple things you MUST know about the taxes for your new home:
1. What are the current taxes?- Many times when a home is newly built the taxes are only based on the land. This amount is much less than what your taxes will be once the home is appraised by the county.
2. What will your taxes eventually be?- You also must know what the taxes will be once the county appraises the home. This can usually be estimated by the sales price times the tax rate. This will not give you exact amount, but will give you a pretty good idea.
3. Escrow Account- An escrow account is the account that holds your taxes and insurances, until they are due. Find out from your lender if they will be collecting the current land taxes(called unimproved taxes) or the future tax amount.
4. Your Game Plan- Once you know these three items, you can start to plan for when your taxes increase and how it will affect your payment. If your new mortgage payment will collecting the current tax amount(just land), then you know you will need to save the difference of the current taxes and what the taxes be eventually. As an example, let’s say right now your taxes are only $100 a month but once the home is appraised by the county and the tax bill comes out your payment will increase to $500 a month. Then you know you need to save an extra $400 a month into a savings account. That way when the tax bill comes out and there is not enough money in your escrow account (due to the lower payment), you can pay the difference.
If your escrow account does not have enough money to pay your tax bill, it is called an escrow shortage. Your Mortgage lender will pay the taxes but will then give you three options:
1. Pay the amount you owe them (the difference in the taxes collected and what was owed). And your payment will go up to what the payment should be with the correct tax amount.
2. Pay none of the money you owe them and your payment increases much higher than what it should be until the difference is collected
3. An option in between. Many lenders will let you pay some of the money owed and come up with a payment to pay the difference.
As you can tell not knowing how your taxes will change on a New Construction home can cause you a major headache. As a lender I explain this to every client I have that is buying a new construction home. But many lenders do not, so it is important to prepare yourself for the changes in your payment.