Understanding Unimproved vs Improved Taxes in Mortgage Settlements

March 26, 2024

Understanding Unimproved vs Improved Taxes in Mortgage Settlements

When purchasing a new home, especially a newly built one, you may come across the terms “unimproved taxes” and “improved taxes”. These terms refer to the property tax values used in your mortgage settlement and can significantly impact your monthly mortgage payments and closing costs. Let’s delve into what these terms mean and how they affect your mortgage.

What are Unimproved and Improved Taxes?
Unimproved taxes refer to the property taxes assessed based on the value of the land before any improvements (like building a house) are madeOn the other hand, improved taxes refer to the property taxes assessed based on the value of the land plus the value of any improvements made.

How Do They Affect Your Mortgage?
Most lenders allow the homebuyer to choose whether the escrow account is based on the fully improved value of the home or the unimproved value of the home. This choice can have significant implications for your mortgage payments and closing costs.

Unimproved Tax Value
f you choose to use the unimproved tax value, your initial monthly mortgage payments will be lowerHowever, once the property taxes are assessed on the improved property value (usually a year or two later), your monthly mortgage payments will increase substantially.

Improved Tax Value
If you choose to use the improved tax value, your initial monthly mortgage payments will be higher, but this will minimize the payment adjustment in future years. This option provides a more accurate estimate of your long-term monthly payments.

Impact on Closing Costs
Using the improved value as a basis for property taxes when establishing an escrow account for new construction can result in a higher amount due at closingThis is because the seller will issue a credit to the buyer for their portions of the year’s property taxes, which will be based on the unimproved valueThis results in an escrow overage and a surplus of money required at closing, which will be refunded the following year after the mortgage servicer does the escrow analysis.

Conclusion
Choosing between unimproved and improved taxes depends on your financial situation and long-term plans. If you can afford higher initial payments and prefer stability, choosing the improved tax value may be beneficial. However, if you need lower initial payments and can handle a substantial increase later, the unimproved tax value might be a better choice. Always consult with your lender or a financial advisor to make the best decision for your circumstances.

Remember, buying a home is a significant financial decision, and understanding all aspects, including how property taxes affect your mortgage, is crucial for making informed decisions.

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