A newly built home property tax can change quite a lot after the purchase, and that can become a huge surprise to buyers. Find out why it happens!

Picture this, you just got your brand new home and it’s everything you’ve ever dreamed of. Although you might have factored in the cost of a mortgage, homeowners insurance, and potential HOA fees, property tax on a newly built home can sometimes come as a surprise, especially if it’s significantly higher than you anticipated. That is more commom than you think. According to a 2023 survey from Real Estate Witch, almost 75% of recent homebuyers had regrets about their purchase, and the main reason behind it is the property tax.

Property taxes tend to change dramatically after purchase, because initial rates are often based on estimates. It can end up being an unexpected extra money invested, after already stretching your budgets to afford a home in the first place. As data showed by a recent report from the National Association of Realtors, more buyers are choosing to get their homes built from scratch. So, it’s important for new owners to be aware of how costs might increase after even just a year, experts say.

“Buyers need to understand that real estate taxes … are not static. They can change on an annual basis, people don’t really have any control.”, said Melissa Cohn, regional vice president at William Raveis Mortgage.

When approving a mortgage for a new construction, lenders consider factors like principal, interest, homeowner’s insurance, and anticipated property taxes. Unlike existing homes with established tax bills, new builds lack this information. So, in order to calculate the owner’s monthly payment, lenders will often use an older tax rate from the area or an estimated tax rate.

Brian Nevins, a sales manager at Bay Equity, explains that these estimates can range from a flat percentage (1-2%) of the purchase price to a more detailed calculation involving a third of the purchase price multiplied by the local tax rate.

Initially, homeowners pay this estimated amount into an escrow. Eventually, depending on the local tax assessment cycle, the local tax authority will assess the new property’s value and determine the actual tax rate. According to Cohn, new constructions always undergo a reassessment.

This reassessment can reveal a discrepancy between the estimated and actual tax amount. If a shortage exists (owed taxes exceed estimate), and the homeowner cannot pay it, the lender will typically cover the difference. The homeowner then repays the lender through higher monthly mortgage payments.

Therefore, basing affordability solely on current property taxes and insurance can be misleading. Experts recommend digging deeper to understand potential future costs. Consulting a local loan officer familiar with the area’s financial landscape is recommended. They can provide valuable insights into potential hidden costs.

“People who buy today with the assumption that they qualify based on the current real estate taxes or current insurance need to really do more homework to understand where they could really be in a year. If you’re looking to buy in an area you’re unfamiliar with, find out how often the county reassesses property taxes and what the reassessment formula is based on.” Cohn said.

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