The average homeowner in Texas paid approximately $3,797 in property taxes in the past year—a major cost. Knowing how your property taxes are calculated, when they’re likely to increase, and the mechanics of how you pay property taxes can go a long way in helping you prepare for this big-ticket expense.
After all, most homeowners don’t pay their property taxes in a lump sum at the end of January. Instead, homeowners with a mortgage often pay 1/12 of their anticipated monthly property taxes into an escrow account managed by their lender.
If you’ve recently received a letter from your lender explaining that your mortgage payments will go up or down in the coming months, keep reading to learn more about what’s happening behind the scenes. This article explores the fundamentals of personal finance for homeowners, including:
- The unique tax structure in Texas
- How property tax bills are calculated
- The effect that property taxes can have on your monthly mortgage payments over the years
With this overview, you can start strategizing about stabilizing or reducing your property tax obligations so your mortgage becomes more predictable and affordable.
Taxes in Texas: It Comes Down to Property and Sales Taxes
Unlike most other states, Texas does not have a state income tax. Instead, two major sources of tax revenue go toward local and state budgets:
- Sales tax: Texas (as a state) levies a 6.25% sales tax on most goods and services. Smaller tax jurisdictions, such as cities or counties, can place additional sales taxes of no more than 2%. This gives rise to the sales tax rate that most Texans are familiar with: 8.25%. So if you purchase a retail good for $10, the total payment due would likely be $10.825.
- Property taxes: Property owners such as homeowners must pay taxes based on the calculated value of their property. The total tax rate varies from city to city or county to county, but the average effective tax rate is approximately 1.60%. If you own a home valued at $300,000, you can expect to pay approximately $4,800 in property taxes.
Related: Top Property Tax Exemptions in Texas Every Homeowner Should Know
The property tax rate in Texas is much higher than in most other states because it makes up for the lack of state income tax in terms of revenue. Property tax payments go toward city budgets, emergency services, road construction and maintenance, school districts, and other municipal and state responsibilities.
How Property Taxes Work (And What You Need to Know About the Moving Pieces)
City and county governments work continuously throughout the year to calculate, assign, and enforce property tax payments. However, there are key dates that every homeowner should know, as these dates affect your payment obligations and ability to appeal your taxes.
- January 31st: Property taxes for the previous year are due.
- April and May: Homeowners receive their Notices of Appraised Value, which indicate if the value of their home has increased. You can file a protest notice if you believe your home has been inaccurately assessed. (This is the mechanism for fighting your property taxes—while it’s commonly referred to as ‘protesting your property taxes,’ you’re protesting the appraised value, which determines your total tax obligation.)
- May 31st (or 30 days after receiving your Notice of Appraised Value): Your protest notice is due by this date.
- June and July: Your local appraisal district will oversee protests and property value hearings to finalize the appraisal district roll and send it to your local tax office.
- October: Your local tax office will finish calculating your property’s effective tax rate and send out your final property tax bill. Payment is due by the end of the following January.
While having a calendar view of property assessments and tax processes is important, it’s also important to clearly understand the process. It unfolds in three broad steps:
1. Your County and City Have Established Budgets With a Slim Margin for Growth
Every city, county, and taxing jurisdiction operates within a set budget. These budgets are largely fueled by the property tax revenue collected on properties within their jurisdiction. Each taxing body cannot increase the total pool of property tax revenue they collect by more than 3.5% per year without voter approval, so budgets often remain fairly stable and predictable. Taxing authorities will use the anticipated spending or budget in the third step.
2. Your Local Appraisal District Will Assess Your Property’s Taxable Value
Separately from budget considerations, your local appraisal district is responsible for assessing the value of properties within their jurisdiction. Homes must be individually assessed at least once every three years, and appraisal districts can use algorithms in the in-between years to calculate estimated property value increases based on sales and other local activity.
Your home’s value can fluctuate significantly year over year. In fact, many Texans have seen a precipitous and costly increase in their taxable property values in the past three years. However, there are two mechanisms most homeowners can use to control their property values and keep them as low as possible:
- Homestead exemption: Filing a homestead exemption will “cap” increases on an eligible primary residence’s property value at 10%, not including any changes in value if the homeowner has made updates and improvements.
- Protesting your property assessment: In the spring, you or a representative can file a notice to protest the appraisal district’s valuation of your home. You can present a counter-valuation and evidence supporting your stance, and a review board will decide.
Once all property values have been finalized, the information is sent to your local tax office.
3. Property Tax Rates and Property Tax Bills Are Calculated Near the End of the Year
Here, tax officials use the required amount of property tax revenue based on spending forecasts or budgets and the property valuations of all the properties within the applicable district. They will use this information to calculate the tax levies and rates for cities, counties, school districts, and junior colleges. Then they will calculate the effective tax rate that applies to each individual property with consideration of the property’s exact location and any applicable exemptions on the property.
Your effective tax rate multiplied by your property’s value determines your total tax bill. While this is a broad and simplified overview of the process, you can use it to navigate the tax process more nimbly.
How Property Taxes Can Change the Size of Your Monthly Mortgage
When the tax office finishes calculating your property tax bill in October, you likely won’t suddenly face a multi-thousand dollar bill due in January 2024. Instead, your lender is incrementally charging you for a portion of your anticipated tax bill, and they’ll manage the transfer of funds to the correct destination in January. Let’s examine that process in a bit more detail.
Property Taxes Go Into Your Escrow Account
Most homeowners with a mortgage have an escrow account. This account is managed by your lending service, which will hold accumulated portions of your property taxes and home insurance premium throughout the year.
Your monthly mortgage payment has four main components:
1 and 2. Your direct mortgage payment is composed of your principal and interest payments.
3. Approximately 1/12 of your annual house insurance premium
4. Approximately 1/12 of your anticipated property tax bill for the current year
Because your local tax authority won’t release your final bill until the fall, your lending service forecasts your likely amount due. Most lenders are precise, and your payments will closely reflect the final amount.
If Your Property Taxes Increase, Your Mortgage Will Go Up
However, because your property value is likely to increase year over year (and local budgets are also likely to increase year over year), the property tax portion of your mortgage will increase in turn. You may pay $1,900 monthly for one year and then $2,050 per month the next year, even if your principal, interest, and house insurance payments don’t change.
Related: Why Did My Mortgage Go Up After a Year?
Conversely, Your Taxes Can Go Down
Similarly, your mortgage payment might go down throughout the years. This can happen if your property’s value decreases, your city or county government is reducing its spending, or your lending service overestimated your tax obligations, and they collected a surplus of funds.
If Your Lender Miscalculates Your Property Tax Obligations, That Will Impact Your Monthly Mortgage
As accurate as many lending services are, their forecast may be hundreds or even thousands of dollars off in either direction. If they collect too much in your escrow account for property taxes, you may have an artificially low mortgage in the subsequent months to correct this. Alternatively, if they collected too little (an escrow shortage), they’ll essentially pay the difference up front and then increase your monthly mortgage to recoup those funds and correct their forecast.
Stabilize Your Mortgage Payments By Making Your Property Taxes More Predictable
Property taxes are complicated, and, especially in Texas, they can be expensive. Reducing your property taxes—such as filing property exemptions or protesting your property valuation—can make your payments more predictable and affordable.
At Home Tax Shield, we’re here to help. Our team can manage the property assessment protest process on your behalf by filing the paperwork, creating a counter-valuation of your home’s value, and presenting evidence in front of a review board as your appointed representative. Reach out today to see how you can strategically manage your 2023 and 2024 property taxes.