How Property Taxes Affect Your Mortgage Closing Costs

30 April 2025

Property taxes. Just hearing the word might make you cringe, right? For many of us, it’s one of those inevitable parts of life, like death or doing dishes. But when you’re buying a home, property taxes don’t just play a role in your monthly budget—they can also significantly impact your mortgage closing costs. If you're scratching your head wondering how, don’t worry—you’re in the right place. Let’s break it all down together.

Understanding Mortgage Closing Costs

Before we dive headfirst into the property tax rabbit hole, let’s take a step back and talk about closing costs in general. When you’re buying a home, there’s more to it than just handing over a down payment and signing some papers. Closing costs are essentially all those pesky fees and expenses required to seal the deal.

These costs typically include things like:
- Loan origination fees (your lender doesn’t work for free!)
- Appraisal fees (someone’s gotta tell you what the house is worth)
- Title insurance
- Prepaid expenses like homeowners insurance and, you guessed it, property taxes!

Closing costs are usually between 2% and 5% of the home's purchase price. So, if you’re buying a $300,000 home, you could be looking at anywhere from $6,000 to $15,000 in closing costs. Yeah, not pocket change.

What Are Property Taxes and How Do They Work?

Now, let’s zoom in on property taxes. Every homeowner pays them, but what exactly are they?

Property taxes are taxes imposed by your local government—usually your city or county—on the value of your property. The money collected typically funds essential services like schools, police and fire departments, infrastructure, and parks (you know, the good stuff that keeps your community running).

The amount you’ll owe in property taxes depends on two things:
1. Your property’s assessed value. This is how much your local tax assessor says your home is worth.
2. Your area’s tax rate. This is basically a percentage set by your local government.

For example, if your home is valued at $400,000 and your area’s tax rate is 1.25%, your yearly property taxes would be:
$400,000 x 1.25% = $5,000

The Property Tax-Mortgage Closing Cost Connection

Here’s where things start to get interesting. Property taxes are an important factor when you're calculating your monthly mortgage payment. But what some buyers don’t realize is just how much they impact your closing costs.

1. Prepaid Property Taxes

When you close on your home, your lender wants to make sure everything is squared away for the first few months. That means you’ll often need to pay a portion of property taxes upfront. This ensures there’s enough money in the escrow account (we’ll dig into this in just a sec) to cover the next tax bill when it comes due.

So, depending on when you close in the tax year, you might owe several months' worth of property taxes at closing. For instance, if property taxes in your area are due every six months and you close on your home just before a tax deadline, you’ll likely need to cover the upcoming bill in your closing costs.

2. Escrow Accounts

Speaking of escrow accounts, let’s talk about those for a moment. You know how your monthly mortgage payment includes principal and interest? Well, in most cases, it also includes a portion for property taxes and homeowners insurance.

Your lender sets up an escrow account—a kind of “piggy bank” for these expenses—and collects money from you each month so they can pay these bills on your behalf. At closing, your lender will often require an initial deposit into the escrow account to ensure it has enough cushion for the next tax payment.

For example, if your property taxes are $5,000 per year, your lender might ask for two to six months' worth of taxes upfront. That’s anywhere from $833 to $2,500 added to your closing costs. Ouch!

3. Prorated Property Taxes

Here’s another wrinkle to consider: prorated property taxes. Let’s say you’re buying a home from someone who’s already paid the property taxes for the year. In that case, you might owe the seller for the portion of the year you’ll be living in the home.

For example, if the seller paid $4,800 in property taxes for the full year, and you close on the home in October, you’ll likely need to reimburse the seller for October, November, and December (about $1,200 in this case).

Why Property Taxes Vary by Location

By now, you might be wondering: why do some property taxes feel like a slap on the wrist, while others feel like a full-on sucker punch? Well, it all comes down to your location. States, counties, and municipalities all have different tax rates and ways of calculating property tax bills.

For instance, a home valued at $300,000 in New Jersey might have much higher property taxes than a similarly priced home in Alabama. Why? Because New Jersey is known for having some of the highest property tax rates in the country, while Alabama’s are among the lowest.

This variability can make it tricky when comparing homes in different areas. A house that seems affordable based on its price might suddenly look less appealing when you factor in sky-high property taxes.

Tips to Prepare for Property Taxes in Your Closing Costs

Okay, so property taxes can be a big deal when it comes to closing costs. But don’t panic—we’ve got some tips to help you navigate it all.

1. Do Your Homework

Before you fall in love with a home, research the property taxes in the area. Most real estate listings include an estimate of yearly property taxes, but it’s always a good idea to double-check with your real estate agent or local tax assessor’s office.

2. Ask Your Lender Questions

Your lender is your ally in this process, so don’t be afraid to ask questions. Find out how much they expect you to prepay in taxes and how much they’ll require for escrow reserves. The more you know upfront, the fewer surprises you’ll face later.

3. Budget Wisely

When you’re calculating how much home you can afford, don’t forget to factor in property taxes—not just for the monthly payment but also for your closing costs.

4. Consider Timing

If you have some flexibility in your closing date, consider the timing of your local tax cycle. Closing just after a tax payment has been made could reduce the amount you owe upfront.

The Bigger Picture

So, what’s the takeaway here? Property taxes might seem like just another line item on your closing statement, but they can have a significant impact on your bottom line. Understanding how they’re calculated, what your lender requires, and how they vary by location can make the home-buying process a lot smoother—and save you from any nasty surprises at closing.

Buying a home is a big financial decision, and every dollar counts. By staying informed and prepared, you’ll be one step closer to turning the keys to your dream home in the lock. And honestly, isn’t that what it’s all about?