If you've been trying to buy a home but haven't had any luck, you may want to look at new construction. In July, newly built home activity rose almost 6% compared to a year prior. And while you'll generally be looking at a larger mortgage when you buy a newly built home, in exchange, you usually won't have to worry about signs of wear and tear or major issues that come with buying a home that's already been lived in.
That said, when you buy new construction, you're not just looking at higher mortgage payments. You might also be dealing with higher property taxes. New homes tend to be assessed at a higher value than existing homes from the start.
But don't get too comfortable with your initial property tax bill when buying new construction. If your experience is anything like mine, you may be in for a major shock during your second year in that home.
Your property taxes are never set in stone
One thing you must know about property taxes before buying a home is that they're not set in stone. If you sign a fixed-rate mortgage with a monthly payment of $1,000, that payment can't turn into $1,200 after a year and $1,400 the year after that. But you could start out with a property tax bill of $6,000 that becomes $6,300 your second year in your home and $6,500 a year later.
Property taxes are calculated by taking your home's assessed value (namely, what it's likely to sell for based on its condition and market conditions) and multiplying it by your local tax rate. If properties in your area are assessed every year, you run the risk of seeing your property taxes rise every year. This holds true whether you're buying new construction or an older home.
Why new construction could lead to a shocking rise in your property tax bill
Even though your property taxes could spike from one year to the next with any home, with new construction, that's more likely to happen early on. It's what happened to me. Between my first year of being in my newly built home and my second year, my property tax bill rose roughly $2,000. And there's a reason for that.
When a home is newly built, its full value sometimes isn't assessed correctly right away. This can happen because sometimes assessments are done at a point when the build hasn't been finalized. As such, you might see your property tax bill rise after another assessment is done. That's an expense you'll want to prepare for.
I happen to live in a state with very high property taxes, which explains why my bill rose by $2,000. If your state or area has lower property tax rates, you may not see such a dramatic spike. But it's still important to prepare yourself for an increase. So when you crunch the numbers to see if you can afford your home, don't just run with the property tax bill you're given at the time. Instead, inflate that number and make sure you're still within your budget.
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To put it another way, if you live somewhere with moderate property taxes and your initial tax bill is $4,500 on your newly built home, make sure you can afford a bill of $5,500. You might see your taxes climb by $1,000 between your first and second year in your home.
Another good bet? Talk to your real estate agent and ask what sort of property tax increase to expect. They may be familiar with those increases if they've sold a lot of newly built homes in the area.
Property taxes are an unavoidable part of owning a home. But be aware that when you're buying new construction, yours might start out higher to begin with and climb rapidly after a year.
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