Why Real Estate Taxes May Go Up After Closing
Why would real estate taxes go up after closing? When closing on a home purchase there are a couple of things to consider about the real estate taxes. One thing to consider is that normally when qualifying a buyer for a home purchase and in setting up an escrow account the taxes of record are used. That means if the property being purchased is valued much less than what one is paying for the home the taxes will be based on the current value not the sale price. This can be confusing when utilizing an escrow account for taxes. And, another thing, it can be beneficial for someone who has a tight debt to income ratio.
For instance if a home is currently valued at $100,000 but a buyer pays $130,000 for the home the taxes the lender escrows will be based on the $100,000 value. At the time of closing all the lender knows is the current value and the taxes of record. That is the value they use to set up the escrow account and qualify the borrower for PITI (principal, interest, taxes and insurance).
You can imagine a lender sets up the monthly escrow to reflect the tax value at closing. However, when the new year rolls around the tax records are revised to show the purchase price. In our scenario the taxes will be higher than the lender has escrowed for. This results in a shortage in the account to pay the taxes when they come due AND an increase in the monthly payment because the lender will begin to escrow taxes for the purchase price.
Usually a lender will pay the taxes even if the account is short and send a notice to the home buyer allowing them to pay the shortage in a lump sum or stretch it out over the next year. The important thing is to be educated about this facet of an escrow account so it is not a surprise if and when it happens.
In my Northern Kentucky market the county tax bills typically come out in October. City taxes can vary. I always discuss with home buyers the basis on which the lender is collecting taxes and forewarn them if they should start setting aside funds to pay a higher bill in the future (in the case of buying a home that is taxed much lower than the sale price).
A very common situation is if you purchase a home from an elderly person they have a homestead exemption that results in lower taxes for them and from which you would benefit perhaps the first year. This is often the case, but eventually the home is valued at the purchase price at the tax office. Best practice: Pay attention to the current value when you close on a home purchase so you'll know if your taxes will be going up the next year.