Does a Refinance Cash-Out Affect Property Tax?

A cash-out refinance is a fairly simple transaction. Say your home is worth $200,000 and you currently owe $130,000 on the mortgage. Equity is the difference between the home's value and your mortgage debt, so you have $70,000 worth of equity in the home. To "unlock" some of that equity, you might take out a new $150,000 loan backed by your home. You use $130,000 of that money to pay off the original mortgage. The remaining $20,000 is cash you can spend. You've refinanced, meaning you replaced one loan with another, and you got cash out of the deal. Ta-da: cash-out refinance.

The property taxes you pay are based on your home's assessed value. That's the "official" value the local taxing agency puts on your home. Property tax assessments get updated periodically. How often that happens depends on where you live. In some places, reassessment occurs every year; in others, it's every two years or even less frequently. Home sales commonly trigger automatic reassessments. The good news for a homeowner who's refinancing, however, is that while a refinance resembles a sale in many ways -- taking out a new loan, paying off an old one -- it isn't a sale for property tax purposes. So a cash-out refinance won't automatically change your property taxes.

Although a refinance isn't a sale, your new loan will still be a matter of public record because the lender has a legal claim on the property until you repay the loan. That means that when the time comes to revalue your home for property tax, the assessor will be able to see how much you borrowed. If the new loan suggests that your property has increased in value, that might lead to an increase in your assessment, which will ultimately boost your property taxes.

Say that your home is assessed at $200,000 and you owe $130,000 on the mortgage. You want to do a cash-out refinance, so your lender performs an appraisal on the property and concludes that its value has risen to $250,000. Hey, cool. You take out a new loan for $230,000, pay off the old loan and take $100,000 out in cash. The next time your home comes up for reassessment, the assessor will see that you took out a $230,000 loan on the home -- meaning the home must be worth at least that much. That all but guarantees a higher assessment and higher taxes. Keep in mind, though, that your taxes might have been going up anyway. If the bank thinks your property is worth $250,000, the assessor might have come to the same conclusion even without seeing the loan.