Your home’s value is a huge part of your overall financial picture. It probably represents a good chunk of your net worth, and it’s how those dreaded annual property taxes are calculated. However, if you ever try to look up the value of your home, you might find varying numbers.

That’s because your home is valued in different ways, for different reasons. Most often, you’ll have a market value and an assessed value, the latter of which is quite a bit lower. But don’t worry—that’s usually a good thing.

Here’s a closer look at market value vs. assessed value, how they’re calculated and what they mean for you.

What Is Assessed Value?

The assessed value of a home is generally used for tax purposes. Though homeowners usually want their property values to grow over time, in this case, it’s better when the home’s value is lower. That’s because the higher the assessed value, the higher the property taxes.

Depending on your location, a municipal or county tax assessor will evaluate several factors, including any improvements you have made, whether you make any income from the property (from renting out a room, for example), the replacement cost of the home if it were destroyed and how much similar homes in the area are selling for.

In some cases, the assessor will come to your property to inspect it. Sometimes, however, they will complete the assessment remotely using software.

Next, the assessor will take the home’s value and subtract any tax exemptions you qualify for. That number is then multiplied by an “assessment rate” or “assessment ratio,” which is a fixed percentage set by each tax jurisdiction to determine the taxable value of your property. The assessment rate is typically 80% to 90%. Local tax officials will then calculate the property taxes based on the assessed value.

For example, say the assessor determines your home is worth $150,000 and the assessment rate for your county is 80%. That would mean your assessed value is $120,000. That’s the amount that will be used to calculate your local property taxes. This is done on an annual basis, and the information becomes public record.

What Is Market Value?

Market value is used by lenders, buyers and sellers to estimate the appropriate selling price given current market conditions. It’s essentially the value that assessors attempt to come up with before applying the assessment rate.

An easy way to think about market value is this: What would a prospective buyer be willing to spend on a particular home and/or what would the seller be willing to accept if it were sold today?

Lenders will often hire professional home appraisers to assess market value for prospective mortgage applicants or homeowners who want to refinance their mortgage loans.

Individuals can also purchase an appraisal on their own or hire a real estate agent to perform a comparative market analysis. You may want to do this if you’re thinking about selling and want to know how much to list the property for, or have your eye on a home for sale and are curious if it’s a fair price.

Market value is determined by evaluating a number of factors, including:

  • Overall condition. The appraiser will examine the interior and exterior of the home and look for any damage.
  • Curb appeal. This refers to the general attractiveness of the property and its surroundings, including painting, landscaping and other aesthetics.
  • Size. Factors such as square footage, number of bedrooms and lot size also are considered.
  • Amenities. If your property features certain extras such as a pool, includes major appliances or is retrofitted with certain energy saving features, these could factor into the overall value.
  • Comparable properties. The appraiser will look at how much properties in the area with similar features sold for recently. The appraisal should fall into the same ballpark.
  • Buyer’s or seller’s market. The overall state of supply and demand in the market will also play a role in your home’s value. If there is a glut of homes on the market, values will decrease. On the other hand, if demand is high, values can be inflated.

How Assessed Value and Market Value Affects You

As a homeowner, there are many reasons to know your market value. For example, if you bought a home several years ago and the value increased, you have more home equity. You can leverage this to qualify for refinancing or secure a home equity loan.

If you’re looking to sell your property, it’s important to list it for a price that’s attractive to buyers but will also get you the best deal possible. Plus, lenders won’t approve mortgages for homes that are overvalued, making it tough to sell a home that’s priced too high.

And if you’re interested in buying a home, you want to know that the listed price is fair for the market. For instance, if a property’s assessed value is $150,000 but the seller has it listed for $300,000, you can use this information to find out why there’s such a discrepancy and potentially negotiate a lower price.

When it comes to assessed value, you might wonder what happens if you live in an area where the housing market is hot and homes are selling for far more than they’re worth. After all, that’s not exactly fair to homeowners who don’t want to sell and are stuck with the rising tax bill.

The good news is that many states and municipalities have laws in place to prevent property taxes from jumping along with inflated property values. In California, for example, where many of the most expensive housing markets can be found, annual assessment increases are capped at 2% until a property is resold.

How to Challenge Your Home’s Value

The assessed and market values of your home can have a big impact on your own finances. So what can you do if you believe your home’s appraised value is incorrect? Here are three steps to take.

1. Supply Your Own Research

You can’t simply tell the appraiser that you feel like their valuation is wrong and expect them to change it. In order to get an appraisal redone, you’ll need to provide a point of comparison that shows the original value is off.

For example, if you can point to another home in your neighborhood that’s very similar to yours and sold for higher than your home is valued, you should contact your lender and ask that the appraisal be reconsidered.

2. Get a Second Opinion

If the original appraiser isn’t willing to budge, you can hire your own professional to provide a second opinion. This will cost you around $300 to $450 for a typical single-family home. If the second appraiser finds discrepancies with the first valuation, your lender may be willing to accept a different value. It’s not guaranteed, however.

3. Contest Your Property Tax Bill

If you feel that your property tax bill is too high based on what you think your home is worth, you can contest it. In essence, that means disputing the assessed value. To do this, you will likely need to pay a small filing fee. You may also want to hire a lawyer to help you through the process.

Once you provide details about the current condition of your property, a board will review your appeal. It can take up to a few months to find out their decision. If they approve your appeal, your home’s assessed value will be lowered (the assessment rate will remain the same).