The difference between interest and penalty

There are states that apply interest or penalties, while there are also states that impose penalties in addition to interest rates. Take New Jersey as an example, you have the interest rate you have offered on the certificate plus the penalty and then you will get the maximum interest with no penalty on subsequent taxes. Whereas in other states, like Florida, you only get the penalty or the interest rate, not both.

Now, a penalty is different from the interest rate, since it is paid overtime and is normally annualized in most states, such as New York and Illinois. It is being calculated in a period of 6 months. In Florida and New Jersey, for example, if the maximum interest rate is 18%, that means the interest is 18% each year, not 18% straight on your investment. Differently, in Illinois, the interest rate will still be 18% but it will be for 6 months. If in case the tax lien is maintained throughout the year, the investor will obtain an interest of 32%. But if it is to be redeemed in just 1 month, the investor will only receive 3% of the investment from it.

In Texas, where you buy redeemable tax deeds, you will receive a penalty but not interest on your money if the tax deed is redeemed. The redemption period is 6 months for non-agricultural and unoccupied 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% of your money. If you redeem in just 1 month, you will still get 25% of your money back.

Before bidding, always know if the state gives interest or a penalty, or both.