Just how much difference can a neighborhood’s tax rate really make? A lot more than you might realize! Here in the Katy/Fulshear/Simonton area, our tax rates run the gamut from just under 1.8% all the way up to over 3.75%. Tax rates can have a large impact on the real money spent on a home – and to make it worse, that extra money will never be applied to your equity.
Pick your video version….
or Rumble version:
To give you an idea of the impact a tax rate can make, let’s compare two rates. We will use the far end of the spread to be dramatic! 3.78% vs 1.88%
For this exercise we’ll not be concerning ourselves with home owner’s exemptions or the fact that Fort Bend County doesn’t seem to know how to appraise a home’s value. This is just to demonstrate and compare.
Let’s say we are looking at two homes, each priced at $350,000.
Home #1 at 1.88% would have a yearly tax bill of $6,588.
Home #2 at 3.78% would jump all the way up to $11,230. That’s a difference of $6,642 yearly. Or $553.50 monthly. That’s a pretty decent amount of bling you could be using for a lot of other things! You could use it to apply to your equity and pay off your home years ahead of schedule. You could use it as an investment, or groceries, or just save it. Here’s a big thing you could do with it, that $553.50 monthly could finance another $131,284 in home value! That’s based on a 3% finance rate and a 30 year mortgage. That’s a HUGE difference.
Moral of the story, when you are considering what home price you should be shopping for, the tax rates have a huge impact on so much of your basic assumptions about home pricing.
You can check out most of our local neighborhood’s tax rates under Market Snapshots.
Good luck with your home search!
Case Study #1
Two couples have each determined that a budget of $3000 per month can be dedicated to a mortgage payment and property taxes combined. We will call them the Smiths and the Jones. Both couples plan on taking out a thirty year mortgage with a 10% down payment on a new home. Current interest rates they both will qualify for is 2.9%
The Smiths buy in Weston Lakes a home at a sales price of $475,000. They will put $47,500 as a down payment. The area of Weston Lakes that they chose has a tax rate of 2.25 %.
They will borrow $427,500. The principal and interest payment at 2.9% is $1779.38 per month. The yearly tax burden will be estimated to be $11,875 per year, or calculated monthly at $989.58. That puts them at $2,768.96 per month, under their goal budget by $231.04 per month.
The Jones buy a home in Fulshear Creek Crossing with a tax rate of 3.27%.
They find themselves a charmer at $450,000. After 10% down they finance $405,000.
Payment is $1,685.73 per month. Their tax bill is $14,715.00 per year – $1,226.25 per month.
Total of $2,911.98 per month. Under their goal budget by $88.02 per month.
The Smiths have an extra $143.02 per month ($231.04 – $88.02) that they can use towards whatever they wish, plus they have an extra $25,000 in value from the very start in the form of a higher valued home, 475 vs 450.
10 years later they sell the house:
Assuming that both homes have appreciated at 3% annually (national average for real estate is 3-5% annually).
The Jones home is sold at $604,762.00
The Smith home sells at $638,360.00
Of course both mortgages need to be paid off.
The Jones original mortgage of $405,000 now has a mortgage balance of $306,716.98
The Smith’s $427,500 mortgage now has a balance of $323,756.75
The Jones pocket $298,045.02
The Smiths pocket $315,314.98
The Jones also invested their $88.02 into an investment account, earning 4% yearly.
That annuity is now worth $12,960.92
The Smiths were able to invest their extra money also. $231.04 monthly into that same annuity is now worth $34,020.59.
Final numbers. Both families allotted $3000 per month to this home.
10 years later, the Smiths cash out at $349,335.57. The Jones $311,005.94.
The Smiths lived in a more expensive home yet still walked away with an additional $38,329.63 in profit.
Case Study #2
Jennifer has saved up for a long time to get a large down payment for a home in Fulshear.
She has $60,000 to put down. She is trying to decide between two homes. Both homes are priced at $500,000 but one has a 1.88% tax rate and the other is at 3.5%.
Either home will need a first mortgage of $440,000. She is approved at 3.23% interest. That works out to a principal and interest payment of $1910.08 per month with either home. However, the 3.5% home has a tax bill of $1,485.33 per month. The 1.88% home has a monthly of $783.33. A savings of over $700 per month. That’s a pretty good chunk of change to use for other expenses. Or if she decided to invest it monthly and could get just 4% return compounded monthly, it would grow to over $100,000 in just ten years.
These scenarios do not take into account exemptions, or the fact that the tax office doesn’t usually appraise at the true market value of any given home, it is usually valued lower than what the home could be sold for, and sometimes it’s higher. Regardless, the principle remains valid. Just a small shift in tax rate can make a huge difference, especially in the time period that most people own a home.
DISCLAIMER: These are all just examples to demonstrate the effects of tax rates, no legal or tax advice is implied or given.