How Refinancing Affects Real Estate Taxes
12/29/2020 Corinne Browne
When you refinance your home, the process is similar to the one you followed when obtaining your original mortgage. Your finances will be verified and calculated, and your home will be appraised to determine its value to your potential lender. However, PennyMac also has many streamline products that don’t require income or asset verification. There are also products that do not require an appraisal. As a result of a refinance, it’s common for your monthly payment and even your total loan amount to change — but will your property taxes go up?
The short answer is, “No.” Your property taxes will not go up if you refinance, but let’s dig a little deeper in order to clear up any confusion or concerns.
Ready to refinance now? Check out our many refinancing options here! You’ll also find the tools and answers to common questions to help determine the best choice for you.
Appraisal, Purchase Price, and Assessment
To understand this topic completely, it’s first important to know that there are three ways that a value can get assigned to your home: your appraisal, your purchase price, and your assessment. The following demonstrates how each is defined.
Appraisal — Your lender won’t fund a loan for more than your house is worth. This is how they protect their investment in you: they want to make sure that your home is sufficient collateral. In other words, they need to know your home is worth an amount equal to (or more than) the amount of money they are lending you. In some cases the lender will determine the value of your house by ordering an appraisal as part of the homebuying process — and again when you look to refinance into a new loan. Some products do not require an appraisal to refinance.
Purchase Price — Most homebuyers are able to buy their homes for an amount equal to or less than the appraisal price. In very competitive markets, buyers may pay more than the appraised value of a home in order to “beat” other interested buyers. As borrowers typically can’t secure a loan for an amount higher than the appraised value, this is usually done via a larger down payment or by buying a home without a loan.
Assessment — Your assessment is the value that your city, county, or other municipality has determined that your home (and the land it occupies) is worth. Typically updated on an annual basis, your assessment is the only one of these three numbers that is used to determine your property tax amount.
Very few homeowners will have an appraisal, purchase price, and an assessment that all match exactly. However, these three numbers are typically fairly close, unless you are in a competitive or otherwise unique real estate market.
Learn more about home buying in competitive markets in our interview with housing industry experts.
How Your Property Tax is Calculated
There are two numbers used to calculate the total amount that you pay in property taxes each year: your assessment and your tax rate. If your home is assessed at $300,000, and your tax rate is 3 percent, you’ll pay $9,000 a year in property tax. Your property taxes will only go up if your rate or assessment amount increases, and refinancing your home (including the appraisal) does not impact either of these numbers.
The only way that you can connect the refinance process to your property tax amount is as a type of forecast or prediction. If you are in a hot real estate market with rapidly increasing home values, an appraisal amount that is much higher than your assessed value can be seen as a warning that your assessment (and therefore your property tax amount) may increase in the future.
This prediction is not always accurate or instant, however. Assessment value changes occur at a much slower rate than housing market prices, and are typically only adjusted once per year. In addition, many municipalities have laws regarding how much property taxes can be increased within a specific amount of time.
If you’ve been hesitant to start the refinance process because you’re worried your property taxes will increase, you can put those fears to rest. Refinancing won’t impact your property taxes, and it offers many other benefits that can help you reach your financial goals. Explore your refinancing options by starting with our online application or contact a PennyMac Loan Officer today!