Business & Finance mortgage

Does a Refinance Cash Out Affect Property Tax?

By Business & Finance Last updated Friday, April/19/2024

Cashing Out

Home owners who refinance and take cash out at the same time are leveraging home equity to make repairs, investments or pay bills, usually at a reduced interest rate. Because lending rules in 2011 are strict, home owners don't always qualify. They're also usually required to keep a percentage of their home's equity leverage-free -- meaning, they can't borrow the full value of their home. In a cash-out refinance, the home is appraised to measure the owner's equity. Even if the value of the home has increased, the new value does not affect property taxes.

Although formulas vary among local tax assessors, generally speaking, the assessed value of your home is multiplied by a locally determined tax or "mill" rate. If necessary, then exemptions are subtracted by your taxing authority; for example, there are many programs that provide tax exemptions for the elderly or those who are on a fixed income. The assessed value is the value that your tax assessor places on your property and it may or may not be the same as fair market value -- in other words, what your home would fetch in a non-distressed sale on the open market.

It is possible for improvements that are paid for with a cash-out refinance to affect your property taxes, however. For example, if you built an addition, added a pool, expanded your garage or did other significant and measurable improvements, your assessed value may increase, which does result in a bigger tax bill. However, in general, during a refinance, only the current value of the home is used, not the estimated future value. As a result, your taxes won't increase until your town or city decides to perform a reassessment.

Property taxes pay for schools, libraries and roads, in addition to local services, such as the police and fire departments. Many municipalities regularly reassess so owners who have reaped the benefit of increasing property values also pay their fair share of property taxes; when the costs of running a town and school system rise, home owners share the burden based on property value. That's why people who live in expensive homes pay more in taxes. It's also why town and school budgets tend to draw a lot of criticism and debate.