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The Difference Between Interest and Penalty

There are states that apply either interest or penalty, while there are also states that give penalties on top of interest rates. Take New Jersey as an example, you have the interest rate that you have bid on the certificate plus penalty and you will then get the maximum interest with no penalty on any subsequent taxes. While in other states such as Florida, you only get the penalty or the interest rate – not both.

Now, a penalty is different from the interest rate as it is paid overtime and is commonly annualized for most states such as New York and Illinois. It is being calculated over a 6-month period. In Florida and New Jersey for example, if the maximum interest rate is 18%, then that means, the interest is 18% every year, not 18% straight on your investment. Differently, in Illinois, the interest rate will still be 18% but that will be for 6 months. If in case the tax lien will be held for the whole year, the investor will then get 32% interest. But if it will be redeemed in just 1 month, the investor will only receive 3% on his investment.

In Texas where you purchase redeemable tax deeds, you will get a penalty but not an interest on your money if the tax deed will be redeemed. The redemption period is 6 months for non-agricultural and non-homesteaded properties and the penalty is 25%. So if you buy a redeemable tax deed and it will be redeemed after 6 months, you will get 25% on your money. If it will be redeemed in just 1 month, you will still get 25% on your money.

Before you bid, always know if the state gives interest or penalty, or both.

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