What Is a Mill Rate and How Will It Affect My Home Costs?

What Is Mill Rate and How Does It Determine Your Tax Liability?

A mill rate is a figure many municipalities use to calculate your property taxes. One mill is 0.1 cents or one thousandth of a dollar. Thus, a mill rate of 1 means you pay $1 in taxes for every $1,000 of your property's assessed value.

Municipalities determine your tax liability by multiplying your home's assessed value by its mill rate, which is set on an annual basis. So if your local government approves a tax rate of 12 mills, you'll pay $12 for every $1,000 of your home's assessed value.

Keep in mind, the assessed value is different than the appraised value of your home and is often lower than the property's market value.

Let's say, for example, your local tax assessor determines the fair market value for your home is $400,000. At that point, they may apply what's called a residential assessment ratio (RAR), a percentage of your home's actual value, to determine your property's assessed value. Consequently, if the local assessment rate is 25%, your assessed value is $100,000.

The formula to determine your property tax is as follows:

Actual Value x Assessment Rate x Mill Rate = Annual Property Tax Amount

For example, let's look at how property taxes are calculated in Denver using figures from the tax year 2021. That year, the average home value in Denver was $460,000, the local assessment ratio was 6.95%, and the mill rate was 74.618.

Here's what happens when we plug in those numbers:

$460,000 (home value) x 0.0695 (6.95% assessment ratio) x 0.074618 (mill rate of 74.618) = $2,385.54 (tax bill). In this example, the tax bill for the typical home in Denver was $2,385.54 in 2021.

Several tax authorities can levy a mill rate on your property, meaning your tax bill might have several line items that could include mills for your city, county, school district or other entities. Using the above example, the municipality's 74.618 mill rate is a combined rate that includes Denver Public Schools and Urban Drainage District.

Remember, the higher the mill rate, the more you'll pay in property taxes. And since property values tend to rise over time, your property taxes could rise even if your millage rate remains the same.

How Do Taxes Factor Into Your Home Costs?

As a homeowner, your most significant costs are your monthly mortgage, property taxes, homeowners insurance and private mortgage insurance (if you put less than 20% down on your home). Typically, you pay your property taxes as part of your monthly mortgage payment via an escrow account set up by your lender. As such, higher home taxes means you'll have to make a larger payment into that account each month.

With this arrangement, your lender pays your property tax on your behalf when it comes due. Your other option is to pay your property taxes directly to your local tax collector. In either case, you'll need to account for your property taxes when setting up your budget for a new home. Divide your annual property taxes by 12 to calculate the additional amount on top of your mortgage you'll need to come up with each month for property tax.

How Can You Reduce Home Costs?

Taxes are just one component of your mortgage payment, which also includes homeowners insurance, mortgage insurance, loan principal and loan interest. Whether you're buying a new home or plan on living in your current home for an extended period, it's wise to lower your housing costs whenever possible.

Lower Costs When Buying New Home

• Buy in municipalities with lower tax rates. Use property tax rates as a guide and consider buying a home in a different municipality. You may enjoy sizeable tax savings just by buying in a nearby ZIP code.
• Qualify for the lowest interest rate. You may secure a lower interest rate by improving your credit score, buying points, reducing your loan term or making a larger down payment.
• Avoid mortgage insurance. If you're able to put down a 20% down payment on a conventional home loan, you can bypass paying mortgage insurance, which can run up to 2% of your loan balance per year. If 20% is too steep for your budget, consider whether getting a piggyback loan can cover your down payment and help you avoid paying mortgage insurance.

Lower Your Existing Home Costs

• Refinance your loan. A rate-and-term refinance replaces your current loan with a new loan, ideally with a lower interest rate. If you have a little extra cash or 20% equity in your home, you could also refinance your mortgage to get rid of mortgage insurance.
• Recast your home loan. If you've come into some extra cash, you might consider recasting your mortgage to lower your monthly payment. After making a large lump-sum payment, your lender will adjust your payment for your remaining loan term. Since a recast isn't a refinance, you won't have to submit new paperwork or pay 2% to 6% of the loan amount in closing costs.
• Opt for an adjustable-rate mortgage (ARM). Lenders tend to offer lower
  interest rates for ARMs than for fixed-rate mortgages. Reducing your interest rate may provide temporary relief to your budget, but it's essential to plan for higher ARM payments when interest rates rise in the future.

Improve Your Credit to Lower Your Home Costs

The mill rate for your local municipality is a determining factor in your property tax bill. If you're shopping for homes in different areas, you might check the property tax rates in each location. The mill rate may be substantially lower in one location, representing hundreds or even thousands of dollars in tax savings over time.

You can also lower home costs by getting a lower interest rate on a new home loan or a mortgage refinance. Your likelihood of securing a low interest rate is greater with a good or excellent credit score. Check your credit report and credit score for free with Experian to see where your credit stands, and take steps to improve your credit if necessary.