Many new homeowners focus on interest rates and monthly payments when purchasing a home and applying for mortgages in Maryland. However, property taxes are another significant factor to consider, as these will directly affect the monthly payments and the long-term financial strategies needed to pay off the mortgage down the road.
This article examines how property taxes impact mortgages in Maryland, particularly how they should factor into the decision-making process. Homeowners need as many tools as possible in a buyer's market to make the right decisions and plan for their futures.
What are Property Taxes?
Property taxes are assessed at the county or city level, meaning the rates are inconsistent within any given state. The basis for the calculation is the home’s assessed value, as calculated by the Maryland State Department of Assessments and Taxation (SDAT). Notably, the SDAT value is not always the same as the home’s market value. Its criteria are specific to the property tax calculations.
How are Property Taxes Calculated?
Homeowners need to know how SDAT calculates these figures. Here are some of their most significant criteria:
- Recent home sales in the area
- Recent home improvements
- The home’s size and location
- Current market forecasts
This assessment is made once every three years, meaning the property tax value may not reflect the home’s current market value. For example, a significant home improvement may have been made since the last assessment, which would only change the outcome after the next appraisal.
Regardless, the annual property tax calculation is the home’s value divided by 100 and multiplied by the local government’s property tax rate. As an example, a $400,000 home with a county tax rate of $1.20 per $100 would result in an annual property tax of:
($400,000/100) x $1.20 = $4,800
Each of Maryland’s 24 jurisdictions has its tax rate, ranging from $0.80 to $2.61 per $100. This property tax value may be added after calculation, depending on local government policies on additional taxes, stormwater fees, and more.
Regardless of the calculations, property taxes are added to the monthly mortgage payments. This makes budgeting for mortgage payments straightforward within each three-year assessment period, even though property taxes increase the principal.
How to Lower Maryland Property Taxes
Prospective homeowners should strive to reduce their property tax payments when shopping for mortgages in Maryland. Before finalizing a purchase, they should compare property tax rates between other counties, request recent tax assessments for homes they are interested in, and seek potential tax credits and relief.
For example, Maryland homeowners can apply for credits and exemptions such as the Homeowners’ Property Tax Credit Program. This state-funded program provides prospective homeowners with credits toward their estimated property taxes if those taxes exceed a certain percentage of their income. This credit is available to homeowners with a combined gross household income of no more than $60,000 and a net worth of no more than $200,000, including retirement accounts.
Additionally, the home must be planned as the primary residence, meaning the applicant will occupy it for at least six months out of the year. This program’s application period ends each year on April 15. Interested homeowners should prepare documents that prove their net worth and income to make sure they can prove their eligibility by the deadline.
What is the Homestead Cap?
The Homestead Cap is another important factor for Maryland homeowners to consider as they calculate their mortgages on prospective homes. It is a tax credit that limits how much a home’s assessed value can increase. This cap is 10% in Maryland, but individual counties may set it lower.
In practical terms, if the market spikes suddenly, a home value reassessment cannot increase the property taxes owed by more than 10%. Without this cap, market fluctuations could lock homeowners into increases of thousands of dollars in property taxes, leaving them unable to pay their mortgages.
You can view the cap for various Maryland jurisdictions here.
Partner With Experienced Mortgage Advisors to Manage Property Taxes in Maryland
Property taxes are one of the hidden complexities of new mortgages in Maryland or any other state. Homeowners in Maryland specifically have a few advantages, such as their homestead cap and property tax relief program. Many homeowners are unaware of how property taxes are calculated, leading to low budgeting transparency as they plan their long-term finances around their new mortgage.
At Woodsboro Bank, our team of experienced financial advisors helps homeowners in Maryland recognize the factors that influence their property taxes, apply for exemptions, and find mortgages that make sense. Contact our professionals today to learn how to budget for property taxes for your new home.