Do You Have Enough Homeowners Insurance?

Homeowners insurance is not required by law, however, when you finance your home through a mortgage lender, they will most likely require you to take out a homeowners insurance policy. Paying into such an insurance policy each month assures that the necessary funds will be there for repairs and other issues should the need arise.

Of course how much insurance you need is one of those “it depends” situations.

The Federal Reserve Board estimates that most American homeowners spend anywhere from $300 to $1,300 annually on insurance policies for their homes. However, it definitely depends on where you live. For example, coastal homeowners pay significantly more because of the risks associated with storms, wind and flooding as opposed to those in rural areas who pay much less.

Another factor that determines how much is put into homeowners insurance is that of property values. This can become very tricky because of the wide disparity in home values throughout various regions of the country. Homes in many metro areas are much more expensive, such as in New York, NY, where the median home value is $571,700.

The other point to consider is income. In areas where folks are making substantially more, they are also buying much more expensive homes which necessitates insuring them for more than the national average.

So, if we are not all paying the same for our homeowners insurance, how can we know if we have enough?

The basics should take care of the replacement cost of your home, excluding the land. Of course, the contents of your home should also be covered.

Beyond that, it is advisable to consider “worst case scenario” coverage, especially if you live in an area prone to natural disasters. For example, the cost of relocating should your home suffer damage, plus meals and living expenses should also be included. Yet another concern for homeowners is the prospect of someone being injured on your property, such as a pool accident or falling down the stairs.

If you purchased your policy in a rush and are not really sure as to what it covers, go over it with your insurance agent. Keep in mind that a standard policy may be on the minimalistic side and you may not know what it actually covers.

Here is a look at the most common issues that insurance adjustors deal with:

Water Damage

Common claims includes problems caused by burst pipes, leaky roofs, overflows from bathtubs, and faulty appliances. When undetected these in turn lead to the even bigger and more costly issue of toxic mold, which can be hidden for months.

Accidents

A homeowner is the responsible party if any one is injured on their property. Play it safe by taking all of the necessary precautions that pertain to your property, such as fences around pools and ponds, sturdy handrails, secure steps and so on.

Animal Attacks

Dog bites are the main issue here, and the statistics are alarming. According to insurance information website, NetQuote.com, “the average dog-bite cost per claim in 2012 was $29,752. Dog breeds frequently excluded by carriers include pit bulls, Akitas and German shepherds.”

Don’t think that signs such as “Beware of Dog” will free you of responsibility should your pet attack someone. Even if you live on a private road, you are responsible if your pet bites someone who steps onto your property. It is recommended that pet owners include $100,000 additional personal liability coverage on their policies.

Fire Claims

In order to recover losses from a fire, the only way to ensure that it happens is through what’s known as “proof of inventory.” Make a comprehensive inventory of the contents of your home and document it with photos and video. Other considerations are fire policies that cover the expenses of housing, meals, clothing, and other daily essentials that would be impacted should you lose everything in a fire.

Before running out and tripling your homeowners coverage, a little DIY boo-boo proofing may be in order. You could hire a home inspector or do it on your own, but the first task is to make sure that each of your home’s systems are up to code. Next, take steps to bolster your home against weather and natural disasters. Along with the usual safety measures of storm shutters and smoke alarms, consider upgrading your roof, alarms and deadbolt locks. Believe it or not, making your home more secure can also potentially save you money on your homeowners insurance!

Other helpful resources:

Ways to Save Money on Homeowners Insurance – eLEND.com

Home Insurance FAQs – Allstate.com

Credit Scores and Home Insurance – LibertyMutual.com

Easy Ways to Get Cheap Home Insurance – Bankrate.com

 

 

Deciding Whether or Not to Pay Points on a Mortgage

When a homebuyer pays for “points”, he or she is paying a portion of the loan’s interest up front. Points are paid for in a lump sum that will reduce the interest rate on a fixed mortgage. Each mortgage loan point costs the buyer 1 percent of the total mortgage amount. So, for a home with a price tag of $100,000, one mortgage point would cost $1000. The interest rate on a 30-year fixed mortgage is generally reduced by 0.125 percent for each discount point. The more points the buyer purchases, the lower their final mortgage rate will be. Most lenders offer up to three points.

In choosing whether or not buying mortgage points in beneficial, it is necessary to ask yourself a few questions:

Can you afford to pay for the points up front? Would it be better to save any extra cash for other expenses that a home purchase will undoubtedly necessitate?

How long do you plan to keep the home and this mortgage? Those in it for the long term could stand to gain more from lowering their interest rate.

calculationsOne helpful tool to use when making this choice is a mortgage calculator. It will help you determine the amount of the monthly house payment at the interest rate you will lock into without buying points. Then, calculate the price with points. To see how much buying the points would save you, subtract the lower payment from the higher payment. Finally, divide the cost of the points by the monthly about that could be saved. That answer is also the number of months that you would need to keep the loan in order to reach the “break even” level on paying for points.

Here is an example:

  • For a 30-year fixed rate loan of $100,000 with a 6 percent interest rate, the monthly payment for the principal and interest would be $599.55.
  • Buying 3 mortgage points for a total cost of $3000, would trim the interest rate down to 5.25 percent. That would lower the monthly payment to $552.20 and save $47.35 a month.
  • The cost of the points ($3,000) divided by the monthly savings ($47.35) determines the length of the loan. So for this example: 3,000 divided by 47.35=63

So the break-even point would be 63 months or just over 5 years. If you plan to remain in the house for at least that long, then purchasing points might make sense.

Other things to consider when deciding if buying mortgage points is a smart move are:

  • In some cases, the seller agrees to pay for the discount points. Discuss this with your lender to find out if the guidelines for your loan allow this. Typically, the seller would negotiate a higher price in return, however, you would have a little extra cash at closing.
  • Another matter to take into account are that points for residential real estate may be tax deductible. Talk to a tax professional to see how this could affect your situation.

Calculating Your Home Equity

Calculator for crunching numbers. Examining home equity.Knowing the amount of equity you have in your home can be beneficial, especially if you’re thinking of applying for a mortgage refinance.

Calculating your home equity is fairly easy to do. You simply take the current market value of your home and subtract what you owe. For instance, if you have a home that is currently valued at $200,000 and you owe $80,000 in principal on your home loan, then your equity would total $120,000.

Keep in mind that your equity will not stay constant. As the market shifts, so will your home’s value. Additionally, any improvements you make or damages that occur can consequently add to or deduct from your home’s value.

The simplest way to increase your equity is to pay down your mortgage. It should be noted, however, that paying off your principal balance is what really improves your equity – not paying off the interest. Because most of your beginning payments will go toward paying off interest, your equity will build slowly at first.

There is a way to build equity faster, and that is by shortening the term of your mortgage. Switching from a 30 year home loan to a 15 year fixed rate loan will increase your monthly payment, but a larger amount will also be put toward the principal each month. This is becoming a popular option for people who want to own their homes outright and be mortgage free sooner. [Read more…]

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