Property tax is an ad valorem tax, which is Latin for “according to value.” The assessed value of a property is based on a number of factors, but it is not an official appraisal like the one you might get when you’re buying or selling a home.
How Assessed Value Works
The tax assessor for your local municipality is responsible for calculating the assessed value of properties within that municipality. The method for determining assessed value can vary from municipality to municipality. However, in general, assessors start by calculating the fair market value (FMV) of your home. They will look at comparable properties in the area, along with the specific attributes of the home, including square footage and the features of the home. In some cases, assessors may even be required to visit a property personally for an inspection. Once an assessor calculates the market value of your property, the municipality will calculate how much you owe in property taxes based on a residential assessment ratio (RAR) and millage rate. The RAR is a percentage that states or municipalities apply to a home’s market value before the tax rate is applied. If your home’s value is $500,000 and the RAR is 40%, your home’s assessed value is $200,000. From there, your municipality will apply a tax rate that’s sometimes called a “millage rate”. The millage rate is typically expressed as an amount per $1,000. For example, with an assessed value of $200,000 and a millage rate of $15 per $1,000 (or 1.5%), your property taxes for the year would be $3,000 ($200,000 x 1.5%).
Assessed Value vs. Fair Market Value
The FMV of a home is typically calculated by an appraiser who uses comparable properties, market conditions, and features of your property to determine a value.
What Assessed Value Means for You
The assessed value of your home is important because it determines how much you owe in property taxes every year. As the value of your home increases over time—typically, it’s updated annually—your property tax bill is likely to rise, too. Remember, though, that in many cases, you don’t pay your property taxes directly. Instead, your loan servicer estimates how much you’ll owe and divides that estimate into monthly payments. The servicer then tacks those monthly payments onto your principal-and-interest payment. When property taxes are due, the servicer will pay them on your behalf. If the estimate was correct, nothing changes. But if the assessed value increased and you owe more property taxes than what you paid, you may need to make a lump-sum payment into your escrow account to satisfy the amount owed. On the flip side, if the lender overestimates what you owe, you may receive an escrow refund. In some cases, you may be able to pay property taxes on your own without contributing money to an escrow account.
