“How come my mortgage went up $400/month?” I’ll get this frantic text sometimes from friends who have purchased a house in the past year…..and I already know the story. Unless they got themselves into an adjustable rate mortgage (which is the DEVIL)….it’s likely that their property taxes just became uncapped with the new sale of their home. Now….very much like anything that the government touches….the confusing topic of property taxes is a complete sh*t show. But it’s an important topic to understand, because it could cost you tens of thousands over the course of your home ownership, if you enter blindly. Important Terms To Know About Property Taxes as defined in plain English: Market Value: What you can ACTUALLY sell your home for today. The Assessed Value: Usually 50% of market value as defined by count/city assessor Some cities have the need to “feel special” and their assessed value may be a different percentage of the market value. “Why don’t assessor’s use fractional assessment instead of full assessment?” Couldn’t tell you. And honestly, if you ask one….I doubt THEY could tell you. You could expect an answer like: “That’s our city policy.” Dumb? Absolutely. But we’re just getting started down this dumb road. The State Equalized Value (SEV): Pretty much the same as assessed value, but the gov’t likes to pay other people (i.e. The County Board Of Commissioners & Michigan State Tax Commission) to double check. What can it hurt? After all, the tax payers are covering the bill 😏 This SEV is also 50% of a home’s market value. Taxable Value: The value that the homeowner will pay taxes on. THIS is an important number, and we’ll see how this correlates to the SEV & Assessed Value in a sec. The taxable value will increase every year by either the rate of inflation or 5%….whichever is lower. Now, whether they are using ACTUAL inflation or the erroneous reported inflation on the news….I can’t say for sure. (Yes I can….it’s the federally reported number.) But it is “capped” at how much it can increase, until a certain event occurs. That event…..is the sale of the home. Home buyer beware, or at least informed. How Are Property Taxes Calculated? Our entire tax system is quite LITERALLY stuck in the 1800s following a “Millage” tax system. “The term ‘mills’ in the context of property taxation originates from the Latin word ‘millesimum,’ meaning ‘thousandth.’ In property tax calculations, a mill represents one-thousandth of a dollar, or $1 in tax for every $1,000 of assessed or taxable value.” - Chat GPT. Each city and county has their own millage rate, but I’ll use Wyandotte, as an example, who has a millage rate of 57. Taxable value of 100,000 would be taxed $57 for every 1,000. 100,000/1000 = 100 x $57 (Millage) = $5700 Annual Tax (with annual increases not to exceed 5%) So…..how do all these valuations affect each other? I’ll do my best to simplify it. Taxable value will always follow assessed value (assessments are done annually). But SEV will follow fair market value….it will just be half (for reasons we already determined were dumb) So over the course of a decade, it’s possible your home value (and in turn the SEV) could double. But the taxable value could have only risen 30-40% in that time. As mentioned, property taxes are not allowed to increase more than 5% each year UNLESS the home sells….then they become “UNCAPPED” (like literally opening Pandora’s box) and the taxable value will increase to match the assessed value (50% of sale price). So if you are looking to purchase a home that LAST sold in the 90s……you can expect property taxes to increase 200-250%. Here's an example: Mr. Johnson, a hard working Boomer, buys his Wyandotte home for $80,000 in 1990. It’s currently taxed at 40,000. 40,000/1000 = 40 * $57 = $2,280 annual tax. Mr Johnson sells his home today for $300,000. It’s now taxed at $150,000 (the current assessed value). 150,000/1000 = 150 * 57 + $8,550 annual tax! That’s $712/month in taxes ALONE. Moral of the story: Always have your real estate agent calculate what your mortgage payment will be AFTER the taxes get uncapped. Wanna work together? Hit me up. 734-679-0174
