The fact that property taxes are paid in arrears means that in the current year, you are paying the property taxes owed for the previous year. This is true whether you are buying a new construction or existing home. But when buying new construction, there is an added detail that some builders or agents may neglect to mention. Your taxes for the first year will be incredibly affordable (like $600 a year affordable). That’s because the year before the home was constructed, the property taxes were assessed on bare land. Once the building process begins, it is assessed on a partial completion and finally on a fully completed home. When the full assessment kicks in, you are going to find that your monthly payment will not include enough money in escrow for the new taxes. They may rise from $50/month to nearly $200/month or more – yikes! If you are unaware, this can be a major issue.
Here is what I tell my new construction buyers – I first explain the way the property taxes work in arrears. Then we make sure that they are comfortable with the payment at the fully assessed taxes. I then instruct them to open a savings account and when they make their payment each month for the first year, they need to put the difference between what the current taxes are and what the fully assessed taxes will be into that account. This does two things for them – 1) They are already used to making the higher payment and are comfortable with it, and 2) when the escrow reconciliation happens at the end of the year and the escrow is short, they can pay the difference out of the savings account and keep their payment from increasing over the remaining 29 years of the loan.
Still have questions? Call me at 605-360-2574 or send me an email at firstname.lastname@example.org.
Sioux Falls, SD
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