Consider Real Estate Taxes

Consider Real Estate Taxes When Buying Your Home

You want to buy as much home as possible for your money, but your new asset can become a liability if you don't consider variables such as property taxes and utilities. The information you have may not be accurate, and you may not know how to forecast how expensive those monthly expenses, whether escrowed or not, can be. Let's say your Realtor sends you a listing from the MLS. You like it, and decide to buy after seeing the home. If you've been preapproved for a loan and the price falls within your lender's parameters, you think you're home free, pardon the pun. But the lender is following a formula, and that formula doesn't include the rising costs of property taxes or utilities.

Most MLSs supply tax roll data in property listing information, but often that data can be outdated, particularly if the seller bought their home long ago. Property tax rate caps can keep long-time homeowners from feeling current property tax pinches, but they can also give a false impression of likely future costs to homebuyers like you. What you need is a true cost-to-own formula that will give you a more accurate idea of what your costs will be to own the home you've chosen. You can take the idea further with water, electricity, gas and other utilities for the area.

Why should you be concerned? Thanks to the easy money flooded into the economy by the Fed; creative low- or no-money down loan products by competing banks, and a strong low-income-friendly homebuyer agenda promoted by government housing authorities including HUD, among other reasons, the barriers to homeownership are extremely low, but the risks remain.

According to Foreclosure.com, the number of foreclosed homes put up for sale rose 50 percent between February and March, one of the biggest monthly spikes the dot-com has seen since it began tracking the market in 1999. The survey showed 28,190 foreclosed homes were put up for sale nationally in March, 50 percent more than in February. More foreclosed properties are available for sale with a total of 80,757, up 10 percent from the previous month. Foreclosure.com gets its data from tracking government and financial institutions.

While many have lost their homes due to job loss, illness and other reasons, many homebuyers are pushed toward foreclosure by poor foresight. A couple of hundred extra dollars a month escrowed for taxes, coupled with rising interest rates on credit card debt, can be enough to cause a homebuyer's finances to spiral out of control. They can avoid foreclosure by simply considering additional data besides an ideal scenario in which rising home prices support the lack of equity being built by low-entry mortgages.

First, home prices don't always rise, and even if they do, they may not rise fast enough to enable a homebuyer to sell at a profit.

Second, almost all costs associated with buying a home are likely to be larger than the homebuyer anticipates. You can avoid these problems by calculating the annual tax rates (city and county plus special assessments) on the purchase price of your home based on the purchase price and rates of increase, which can be hundreds to thousands of dollars difference in what the seller pays.

This is easy to do on your calculator. Multiply the purchase price by the tax rate and hit the percent key. The figure that pops up is the annual tax in dollars. $350,000 X 2.5 percent = $8,750. Divide that by 12 and you'll see what your loan escrow will require (if not more) monthly. Multiply the tax amount with the rate of annual increase, according to recent housing gains, and you could end up paying as much as $10,000 annually within a couple of years. See why this is important stuff? If you really want to be cautious, calculate the current costs of city water, electricity and gas against their rates of increases, multiplied by the number of square feet you are moving up to, and you might find the answers could be eye-opening.

If the popular notion is "Buy as much home as you can possibly afford," perhaps you should consider "Buy as much home as you can reasonably afford" instead. You can always move up one day to another home of your dreams, without feeling strapped and house-poor today.