Texas property tax law changes every few years. See the latest posts for the most up-to-date information.
Whether you live on a fixed income or you’re worried about how skyrocketing property taxes affect your annual and monthly spending, knowing the mechanics behind the scenes of your property taxes can help you plan for the future. Texans receive their annual property tax bill starting in October every year and have a payment deadline of January 31. However, most homeowners quietly pay their property taxes throughout the year every time they make a mortgage payment. Learn more about how those payments operate, why your escrow payments may go up, and how to stay on top of rising property taxes.
What Are Property Taxes?
Property taxes are local taxes issued by your city or county tax office. These taxes are used to fund school districts, city projects, infrastructural maintenance and development (like roads and water systems), and public services like police, emergency medical services, and fire services. Property taxes are assessed and collected at the county level, not the state level, so that you may have very different property tax rates than homeowners in neighboring counties or counties far across the state. However, because Texas does not have a state income tax, Texans have a higher-than-average property tax rate, with an effective average of 1.8% of a home’s assessed property value.
How Do Property Taxes Go Up?
Local authorities determine property taxes by calculating the money they need for county and city budgets. This is based on past years’ spending, recent legislation, and anticipated spending changes. (However, collected revenue cannot grow by more than 3.5% in a year without being voted on by the area’s residents.) That total amount is then divided amongst the properties in the jurisdiction based on the taxes and tax rates applied to each property.
Your property taxes can increase based on two factors:
- Tax rate increases: If the percentage rate of a tax goes up, your tax bill will go up. For example, if your local school district’s tax rate increases from 1.25% to 1.35% on a $200,000 house, the property tax bill will increase by $200.
- Assessed property value increases: If the county assesses your property as worth more than it was last year, your property tax bill will increase. This can happen if you’ve made improvements to the property if your area is facing more demand for houses, and myriad other reasons.
Related: Understanding Why Your Property Taxes are Higher Than Your Neighbor’s
How Do You Pay Property Taxes?
For the vast majority of homeowners still paying down their mortgage, the bill you receive each month isn’t strictly for your mortgage. It also includes a monthly allotment of your property tax bill. These funds are collected in an escrow account managed by your lender. In this arrangement, your lender estimates your property taxes for the year ahead and divides that estimate into twelve portions. Then, when your property taxes are officially due, that collected pool of money goes to your county tax collector. This arrangement can be beneficial, as it means you’re not left with a sudden bill of a few thousand dollars due by January 31 each year.
However, it’s essential to remember that the lender estimates your future tax bill. They tend to overestimate the total to ensure sufficient funds are in your account, and you will receive a refund of any excess funds that the county didn’t need.
Why Do Lenders Manage This Service?
This arrangement benefits most homeowners who don’t want to juggle a sudden four-figure bill at the end of the year. But it’s also helpful for your lender. Failing to pay your property taxes (or requesting a payment plan to pay down your taxes over time) can result in your home being foreclosed on. This is terrible news for the lender because that property tax lien will stay on the property until it’s paid. If the lender wants to resell your home, sell it at auction, or otherwise divest themselves of the property, they often have to pay your property taxes first. By providing an escrow account and encouraging homeowners to pay early in more reasonably sized allotments, this series of unfortunate events is much less likely to happen.
Because escrow accounts protect homeowners and lenders, lenders often offer a discount or a lower interest rate for homebuyers using an escrow account.
What Goes Into Your Monthly Mortgage Payment?
While looking at your property taxes and escrow account, now is an excellent time to review what else is lumped into your monthly mortgage payment. It has four main components:
- The loan principal, or the money you’re directly paying back after borrowing it. For example, if you borrowed $160,000 to buy your home, you will pay back $160,000 in principal over the loan’s 15- or 30-year course.
- The loan interest, or the additional money you owe on the outstanding balance. For example, if you borrowed that $160,000 at a 4% rate, you will pay approximately $115,000 in interest over 30 years. (Your mortgage loan’s amortization schedule will give you a direct monthly breakdown of your principal and interest payments, similar to amounts provided through this amortization schedule calculator.)
- The property taxes, or an 8.25% portion of your lender’s estimate of your anticipated property taxes for the current tax year (paid in advance).
- Home insurance, or the monthly portion of your home’s insurance premium. Similarly, property taxes are often wrapped up in your mortgage payment to protect yourself and the lender. Lenders require certain home insurance minimums throughout the life of the loan and managing that payment allows them to protect their interests.
If you have a conventional home loan, the property taxes become rolled into the monthly mortgage payment; it’s not required, but it’s standard practice. However, this arrangement is necessary if you have an FHA loan for your home. However, other costs of home ownership, such as optional home warranty plans, homeowners’ association fees, and maintenance costs, are not part of your monthly mortgage payment.
Related: Do You Know Your Rights Related to Property Taxes in Texas?
How Property Taxes Impact Your Monthly Mortgage Payment
While your mortgage payment’s principal and interest portions are fixed, your property tax payment is much more fluid. Your lender estimates your property taxes will likely be in your next property tax bill, and your monthly mortgage payment will reflect your good-faith estimate. Suppose you live in a trendy area with lots of housing demand. In that case, your property taxes are likely to radically increase due to rising property values and demand for public services and projects that rely on the funds gathered through property taxes.
Because property taxes tend to increase year over year, you should also expect the property tax portion of your mortgage to rise. There are a couple of different ways a well-managed escrow account can cushion your budget from a sharp rise in taxes. First, lenders may slightly overestimate your property taxes, so while setting a bit more money aside every month, you have less to worry about at the end of the year. Second, most lenders require homeowners to have a two-month “cushion” in their account. This margin of error further decreases the risk you’ll face a large tax bill to catch up at the end of the year.
Lenders consider increases in property taxes as they calculate your bills. However, they also consider your escrow account’s status when determining your bills for the following year. There are two critical scenarios:
- There’s not enough money in your escrow account: If they underestimated the property taxes or you’re behind on a mortgage, you may have a shortage of funds in your account. When that happens, your lender will send you a bill for a one-time extra payment to make up the difference. That shortage will also indicate they should increase the size of your mortgage payments for the following year, so the same thing doesn’t happen again. This is not a fee or a fine. The money is still yours; it’s held in an escrow account until it’s given to the county tax collector.
- There’s too much money in your escrow account: This is a better problem, though it may feel frustrating if the size of your monthly mortgage payments is stressful. In this situation, your lender collected too much money, and you’ll have money left over once your property taxes are paid in full. Now, your lender will issue you a check for that amount (remember: that money was always yours). They may also slightly decrease your escrow payments for the next year, though they need to weigh that against probable increases in property taxes.
What to Do If You Think Your Property Tax Bill Is Too High
Your property tax bill may feel exorbitantly high, to the point where even an escrow account doesn’t fully protect your budget from the blow. If you think your property taxes are inaccurate or unfairly high, you can take a couple of actions. These include:
- File a homestead exemption: If your home is your primary residence, you can file a general homestead exemption. Not only does this exempt the first $40,000 of your home’s value from school taxes, but it also caps how much the county can increase your property’s assessed value at 10% per year.
- File additional exemptions: Senior residents, residents with disabilities, and veterans with disabilities are eligible for other exemptions that can reduce tax obligations in the short and long term. Land tax exemptions for agricultural use and more can also reduce your taxes.
- Protest your property taxes: When you disagree with the county’s evaluation of your home, you can protest it, offer your analysis, and go through an official protest and hearing process to try and reduce your assessed property value to lower your tax bill.
Home Tax Shield Is Here to Help
Home Tax Shield specializes in helping homeowners fight to reduce their property tax obligations, so they’re paying a fair amount. Our team is familiar with how counties assess your property value to calculate taxes and how to protest their valuations successfully. Contact us today to get started if you want assistance working through your property tax bill and learning how to lower it.