Property Taxes Explained: How They Work and What You Pay
Mike Starr
Founder, MortgageWizardTools · M.S. Organizational Management
Property taxes are taxes levied by local governments on real estate. They fund schools, roads, fire departments, and other public services. Property taxes are a significant ongoing cost of homeownership — and they can increase over time.
How Property Taxes Are Calculated
Property Tax = Assessed Value x Mill Rate
- •Assessed value — the local government's valuation of your property (may differ from market value)
- •Mill rate — the tax rate per $1,000 of assessed value (set by local government)
Example: A $400,000 assessed value with a 1.2% tax rate = $4,800/year in property taxes.
How Taxes Vary by Location
Property tax rates vary dramatically by state and county:
| State | Average Effective Rate |
|---|---|
| New Jersey | 2.23% |
| Illinois | 1.95% |
| Texas | 1.69% |
| California | 0.76% |
| Hawaii | 0.31% |
A $500,000 home in New Jersey costs about $11,150/year in taxes. The same home in Hawaii costs about $1,550 — a difference of nearly $10,000 per year.
How Taxes Affect Your Mortgage
Most lenders collect property taxes through an escrow account:
- •Your monthly mortgage payment includes 1/12 of your annual tax bill
- •The lender holds the money in escrow and pays the tax bill when due
- •If taxes increase, your escrow payment — and total mortgage payment — increases
Why Taxes Increase
- •Reassessment — after a sale, the assessed value may reset to market value
- •Rate increases — local governments can raise the mill rate
- •Home improvements — renovations can increase your assessed value
- •Market appreciation — some states reassess regularly based on market values
How to Appeal Your Assessment
If you believe your assessed value is too high:
- •Check comparable sales in your area
- •File an appeal with your local assessor's office (deadlines vary)
- •Present evidence that your assessment is above market value
- •Some jurisdictions offer a homestead exemption that reduces your assessment
Key Takeaways
- •Property taxes are based on assessed value and local tax rates
- •Rates vary from 0.3% to 2.5%+ depending on location
- •Most lenders escrow taxes as part of your monthly payment
- •Taxes can increase after purchase due to reassessment
- •You can appeal your assessment if it is above market value
- •Use our Property Tax Calculator to estimate your costs