Most states offer homestead exemptions that will reduce the assessed value of your home. And by reducing this value, the exemption also reduces the amount you pay in property taxes each year.

How does this work? Maybe your local tax assessor says that your home is worth $250,000. If you qualify for a homestead exemption of $50,000, you will now pay taxes as if your home is worth a lower $200,000. This will reduce your property tax bill.

Say the assessed value of your home is $300,000 and your property tax rate is 2%. Your property tax bill would equal $6,000. But if you were eligible for a homestead tax exemption of $50,000, the taxable value of your home would drop to $250,000. At that same 2% tax rate, your property tax bill would now fall to $5,000, saving you $1,000.

What are the challenges with homestead exemptions? Every state's homestead exemption works differently. And not all states offer them. Some states have limits, such as you must be 65 or older, have a disability that makes earning a living wage challenging or be a U.S. military veteran to qualify for one of these exemptions.

Protection from creditors

Homestead exemptions can also protect some of the equity that you've built in your home. Equity is the difference between what you owe on your mortgage and what your home is worth. If your home is worth $325,000 and you owe $125,000 on your mortgage, you have $200,000 in equity.

The protection that homestead exemptions provide against creditors varies by state. Say your state's homestead exemption will protect $75,000 of your equity. If a creditor forces a sale of your home because of debt you owe and you have $200,000 of equity, you will receive a payment of $75,000 from your state after the foreclosure closes. Your creditor will receive any remaining funds from the sale of your home.

It's important to note that the homestead exemption, even though it protects a portion of your equity, can't prevent you from being foreclosed on. That's because the homestead exemption doesn't protect your equity from secured creditors with whom you've put up your home as collateral, such as your mortgage lender. It only protects your equity from unsecured creditors to whom you haven't provided your home as collateral, such as your credit card providers or auto lender.

What are the state-by-state details?

All states except New Jersey and Pennsylvania offer some sort of homestead exemption, though some might offer only protection from creditors, some only property tax exemptions and some may offer both.

To find out if your state offers a homestead exemption, check your county or local tax assessor's office website or call the office itself. This office can tell you what type of homestead exemption your state offers, how to qualify for it and how much the exemption might reduce your home's assessed valuation. A local, qualified real estate or tax professional should also be able to help you with the details in your region.