Three families shop for houses in three Chicago-area communities. They pick out homes with roughly the same number of rooms and features and pay the same price. All put down the same amount.
And though they get the same terms in their mortgages, each has a different house payment. All things being equal — similar credit profiles and debt burdens — why?
Property taxes.
Those two words can make the difference between qualifying for a mortgage or being turned down, moving to a desired community and getting your kids into your preferred school district or settling for something or somewhere else.
If you can picture your prospective house as a yacht, property taxes are a big part of the dockage, repair and upkeep — the things that spawned the phrase: You can afford to buy a boat, but you can’t afford to own one.
So, $360,000, for instance, might buy you any of the three homes we found for sale in a recent Internet search — in Chicago’s Jefferson Park, an appreciating neighborhood on the Northwest Side; in Elk Grove Village, known for relatively low taxes, thanks to a plethora of businesses in the Cook County suburb; and Bloomingdale, just a few miles south in DuPage County, where taxes generally are higher than in most of Cook County.
Brian Weis, branch manager at the Countrywide Home Loans office at 1730 W. Fullerton Ave., Chicago, worked up some figures to show what kind of income it would take to buy these three homes.
We will assume that the buyer has excellent credit, has 20 percent, or $72,000, to put down on the $360,000 house, and will need a mortgage of $288,000. We asked Weis to base his figures on a 30-year fixed-rate mortgage at 6 1/4 percent (the rates were about 6.125 percent when we spoke last week). Homeowners insurance, he estimated, would run about $60 a month on such a house.
And, while the applicants have great credit, they carry two debts: a $400-a-month car payment and a $250-a-month credit card bill.
So, the family buying the Chicago home would need an annual gross income (before taxes are taken out) of $79,500 to qualify for the $288,000 mortgage, Weis said.
In Elk Grove Village, the family would need to make $81,500 annually; in Bloomingdale, $85,500.
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The property taxes make the difference: The Chicago home had taxes of $3,588; the Elk Grove house, $4,473; and the Bloomingdale home, $6,091.
These examples assume the best of circumstances. If the buyers’ credit were less than excellent, if their debt load were higher and if they put down less money, the income requirements would go up.
Last week, we looked at the entry level for houses in some of the area’s top public school districts, giving examples of home prices and the taxes that went with them. One reader called with a sound of disbelief in his voice.
“Those taxes can’t be right. They’re way too low.”
I explained that the taxes given were the taxes stated on the homes’ multiple listing sheets.
But the man had a point. Taxes tend to go up, rather than down.
That’s because when a home changes hands, it’s the perfect time for the county assessor to take a look at its value, says financial planner John Davis of Mentor Capital in Elmhurst.
While Davis hasn’t seen a client in trouble because of an increase in property taxes, he does point out that a tax hike would be felt most by those who stretched to afford the house in the first place.
Davis advises those with good credit that their total debt — house payment, plus car and credit card payments, for example — should not exceed 35 to 38 percent of gross monthly income.
So, before our three fictitious families celebrate their new homes with a spending spree for furniture, lawn equipment or window coverings, they might want to keep this question in mind: When was the last time you remember property taxes falling?
Our disbelieving reader knows a lot about rising taxes. He was calling from fast-growing Will County, where subdivisions are quickly taking the place of cornfields and the voters had just approved a bond referendum to build a school.
He said his house, in the Crete-Monee area, was worth about $200,000, yet he was paying $5,600 a year in property taxes — with a senior citizen homestead exemption.
I felt badly for him, but he sounded receptive to my suggestion: Move to Cook County.
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Wayne Faulkner is editor of Real Estate. You can contact him at [email protected].