What is Mortgage Life Insurance?

First, let’s get a complete understanding as to what a mortgage life insurance policy is and what it covers if you do choose to put one in place. As a homeowner, if you establish a mortgage life insurance policy and you pass away, the policy pays off your mortgage balance, which alleviates your heirs or family members from having to continue to make mortgage payments. Instead, the mortgage life insurance policy pays off the remaining balance on the mortgage at the time of your death and your heirs now own the home free and clear.

Mortgage life insurance works similar to other insurance policies in that you establish a policy amount and pay premiums on the policy. The trigger for the policy is the death of the homeowner on the property that the policy covers.

At this point, you are probably thinking that mortgage life insurance is at least something you should consider. As you consider it as an insurance option, first learn the advantages and disadvantages that this type of insurance policy offers.

Advantages of  a Mortgage Life Insurance Policy

Insurance—be it on our cars, our lives or our home mortgage—insure an event that may or may not occur in the future. In a situation where the event does happen, the insurance policy triggers, which is an advantage to the policyholder or beneficiaries of the policy.

Some of the advantages of a mortgage life insurance policy include:

• Alleviates the monetary pressure of making mortgage payments for your heirs
• Relieves stress because you know the mortgage will be paid off if something happens to you

Disadvantages of a Mortgage Life Insurance Policy

With the good of establishing a mortgage life insurance policy comes some of the disadvantages.

Some of the primary disadvantages of a mortgage life insurance policy include:

• High cost premium payments (can be thousands of dollars per year)
• Mortgage life insurance policies are not, according to most financial experts, as cost effective as establishing a large enough life insurance policy that includes the amount of the mortgage as well
• Loss on the value of the policy as the mortgage balance decreases. For example, if you put a mortgage life insurance policy in place for a $200,000 mortgage, but the mortgage balance when you pass away is only $50,000, then the mortgage insurance policy only pays off the current $50,000 balance.

Weighing the pros and cons of any type of insurance policy is an important factor before choosing to put a policy in place. Mortgage life insurance is no exception to this rule. You have to weigh the advantages and disadvantages of putting a mortgage life insurance policy in place on your home as it pertains to your own personal financial situation, and your emotional feeling for choosing this option.

You should also consult your financial adviser or tax expert to get a second opinion. Mortgage life insurance policies are not the right fit for everyone. These types of insurance policies may, however be highly beneficial to homeowners that have specific personal and financial situations. Weigh your own pros and cons and then discuss all of this with your advisers. This is the only way you can make an educated decision as to whether a mortgage life insurance policy is your friend or your foe.

Just what events are covered, however, and how much money will be available depend on where the home is located-insuring a home in a flood plain will be harder and more expensive to insure against floods-and how much the home is worth. Unlike a life insurance policy, which can theoretically have no ceiling but whatever you are willing to pay, a homeowners policy is based directly on the value of you home and to a certain degree the assets inside, as well as the reasonable costs to rebuild the home in your particular community.

Coverage Options

Aside from price, the main things that distinguish one homeowners insurance policy from another are the coverage details. Several different types of policies are available, such as HO-2 and HO-3 policies. HO-2 coverage, which is widely used,  lists specific perils that are covered by your insurer, such as fire, wind theft and so on. An HO-3 policy, is also known as an “open peril” policy and includes any damage-causing perils, except those specifically spelled out in your policy.

HO-6 coverage is for owners of condominiums and co-ops and covers improvements to the property as well as standard protection for the basic structure and your possessions. HO-8 is unique to older homes and is based on repair costs or market value of the home, not necessarily replacement cost.

Paying Homeowners Insurance

Because your homeowner’s policy must be set at the time you buy your home, in most cases, you’ll know what your annual premiums are at the time you close on your home. Usually, your mortgage payment will include a portion to cover your homeowners insurance, as well as an amount to pay for property taxes.

If your insurance rates go up, which they are likely to annually, your mortgage payment will have to be adjusted to cover the difference.

Lowering Your Insurance Costs

As with any purchase you make, shopping around before selecting an insurance company is a wise move. The company you have your car insurance with may offer good deals on homeowners insurance, and may extend a discount because you already have your car insurance with them. Other companies provide discounts if you switch all your insurance policies-car, home, life-to one insurer.

You can also raise your deductible, which can help lower your premiums. The benefit is obviously that your monthly out-of-pocket expenses are less. The risk, of course, is that if you need to file a claim, a larger portion of the damages will have to be covered by you, the homeowner, before the insurance company starts to pay.

Upgrading your home with improvements such as hurricane shutters (if you live in an area vulnerable to such storms) may also lower your rates. A home security system, for example, can lead to discounts, too.

If you’ve been with your insurer for a long time, ask about “customer-loyalty” discounts for long-term policy holders. And while you’re at it, always feel free to ask your local insurance agent for ways to save some money on your policy. An independent agent who works with many insurance companies may be able to help find you a policy that is a little friendlier to your wallet.

Renters Insurance

If you don’t own your home, you obviously can’t get homeowners insurance. But renters insurance is available and is recommended to cover your personal property if its stolen or damaged.

Some renters and homeowners insurance policies also provide money for temporary housing in the immediate aftermath of a disaster.

What Are Mortgage Interest Rates?

When you take out a mortgage, you have to pay the bank a percentage of the money borrowed in the form of interest rates. You might think this would be a cut and dry sort of thing, but in actuality interest rates vary considerably.

What Factors Affect Mortgage Interest Rates?

There are several factors that affect mortgage rates including:

• Changes to the Federal Reserve prime rate
• Health of the housing market
• Health of the banking industry
• Fluctuations in the supply and demand of home loans
• International and national economic changes

More Factors That Affect Mortgage Interest Rates

It’s one thing to find out what the lowest interest rates are that a lender is offering, but it’s another thing to find out what interest rates you actually qualify for. The following factors affect mortgage rates you may qualify for:

• Your credit score and history
• The type of property you are buying
• The type of mortgage you are committing to
• The lender itself
• Your income situation
• Your overall wealth/economic health

How Often do Interest Rates Change?

Interest rates fluctuate all the time, which is why your lender may urge you to lock in a rate while it’s low. Use this link to find out what today’s mortgage rates are.

What is the APR?  How is the APR Related to Interest Rates?

You may have noticed there are two rates quoted for your mortgage-the note interest rate and the APR, or annual percentage rate. Your monthly mortgage payments will be determined by the note rate. The APR is the rate you will end up paying over the life length of the loan, assuming you stay in the house for the entire life of the loan (and don’t sell), make payments on time, and make only your monthly payments (nothing extra). It takes into account things like appraisal fees, prepaid charges, PMI (mortgage insurance), lender fees-everything you will pay over the life of the loan, again assuming you keep the loan for the entire length of the loan.

It may help you to understand what exactly makes up the APR, especially if your APR is much higher than the note rate. You’ll want to make your decision on the note rate, but ask for full disclosure of all closing costs and fees (including point options) as well.

What is on a Lender Rate Sheet?

Your lender will consult a lender rate sheet to determine what interest rate quotes to offer. The lender rate sheet details all the mortgage options, possible rates, adjustments to rates related to credit risk factors, and the “par rate”, which is the point at which the lender breaks even. The lender will charge you over the par rate to compensate for any risks identified. The loan officer will look at the lender rate sheet, factor in risks based on your credit history and financial situation, and then will add in charges to make sure he or she makes money off the deal. The end result is your final interest rate quote for a loan option.

Interest Rate Conclusion – Shopping For Interest Rates

It can be difficult to compare interest rates, especially since rates change daily and different types of loans will charge different interest rates. Make sure you do the following when comparing mortgages:

1. Gather your mortgage interest rate quotes on the same day

You have to do this because rates change often, sometimes more than once in a day. Use internet services to gather a lot of quotes quickly. Once you get a few quotes, research the lenders for stability, reliability, and mortgage options. Choose the top three lenders and investigate options from all three in depth.

2. Compare apples to apples

That means you need to make sure the options are similar types of mortgages. For example, an ARM (adjustable rate mortgage) may have a great initial rate, but it may be a terrible deal when the rate balloons later on.  The ARM may look like a better deal when compared to the traditional FRM (fixed rate mortgage), but the FRM may be better for you over the life of the loan.

3. Watch out for false advertising

Some lenders will advertise one rate, but you’ll find out you don’t qualify for a loan at that rate once you apply. They may be advertising their very best rate which is only given out to clients with top-notch credit or who already have a loan with them. You need to get a quote that applies to you.

4. Don’t sign anything until you’re sure you’re getting the best deal possible

Compare different mortgage options to determine which one will get you the best interest rate and the best overall arrangement for your situation. Interest rates are not the only important factors to consider when committing to a loan.

Home Taxes

Home taxes or property taxes are administered by local governments such as cities or counties. A local property appraiser determines a value of your home and then the local tax collector or treasurer collects those taxes.

How Taxes are Determined

Every piece of property in a particular tax assessment unit (often a city or county) is assessed, though not all properties are taxed. Churches, for example, do not pay property taxes. But a market value is placed on all pieces of property and that figure is reached by determining how much the property would sell for under normal conditions.

The taxing unit in which you live establishes a property tax rate every year. This is usually done in a public hearing before a city council or county commission or similar elected body. Your tax bill then, is based on the assessed value of your home and the current tax rate.

Challenging Your Tax Bill

Most taxing jurisdictions have provisions for you to challenge your tax bill. Usually challenges are based on what property owners perceive to be an inflated value of their property. This is a tricky thing for many homeowners, because having a highly valued home is helpful when it comes to selling your home or security a home equity line of credit.

But when you have to pay taxes based on that value, it’s a different story. Property appraisers will look at things such as the price of similar homes sold in your area, as well as conditions that may have changed during the preceding year. A beachfront home, for example, is typically appraised very highly, but if beach erosion has badly damaged the coastline, that homeowner may see his assessment down from when the beach was healthier.

If you feel you can make a case for lowering your assessment, you can take it up with the local property appraiser’s office. There may be a window of time in which you can challenge your assessment before the tax bills are sent out, so be aware and do your homework to be ready for your challenge.

How Home Taxes are Used

Your homeowners’ tax bill can include a long list of agencies and departments getting a piece of your tax payment. Depending on where you live, your tax bill can include a portion for the local school district as well as for general municipal expenses, such as law enforcement and public safety, public utilities, parks and libraries, roads, and other services. Your tax bill may also be broken out to include special taxing districts to pay for water, sewer and road work specifically in your community.

Why Do You Need Homeowners Insurance

Homeowners insurance covers damage to your home as well as liability protection for injuries or property damage caused by you or members or your family – even pets. If your home is damaged by fire or is robbed, your homeowner’s insurance is there to cover your losses. Most natural disasters are covered, though in some areas, flood insurance and earthquake insurance must be purchased separately.

Insurance covers the structure of your home, your personal belongings, liability protection and temporary living expenses if you are unable to live in your house because of fire damage, for example. And this is why you need homeowners insurance!

Coverage varies from company to company, but typically your coverage for the loss of personal belongings is between 50 and 70 percent of the coverage you have for your home. If you have $200,000 in coverage for the structure of your home, you may be covered for $100,000 to $140,000 for the loss of personal belongings.

How Much Do You Need When it Comes to Homeowners Insurance

You’ll need enough coverage to pay for rebuilding your home, but it’s important to remember that if building codes have changed in your state or county, you may need to rebuild to different standards than were in place when the home was built. Older homes can be a little more complicated to insure, because the features of an older home, such as plaster walls and wooden floors, may not be fully covered. Instead, you may have coverage to pay for the costs of using more contemporary materials or building methods to restore your home.

Rising Homeowners Insurance Costs

In areas that experience a lot of claims, such as Florida with its hurricanes and California with its earthquakes and wildfires, homeowner’s insurance rates tend to climb every year. What makes that situation even harder on homeowners is that insurance companies tend to pull out of higher-risk states, leaving fewer companies from which homeowners can choose.

Facts About Home Ownership

• A home allows you to build equity and wealth.
• A down payment of twenty percent can save you from paying Private Mortgage Insurance (PMI).
• PMI protects the lender if you default on the loan but will not protect you if you do not make payments or if your home is destroyed in a disaster.
• Plan for your house payment to be about twenty-five percent of your income.

Preparing for Home Ownership

Before you buy a home you should be in a good position financially. Having a good credit score will help you qualify for the best interest rates, but you may be able to qualify for a loan with federal assistance even if your credit score is not perfect. Saving up a down payment will help show lenders you are ready to buy a home and it will allow you to purchase a more expensive home.

Steps to Buying a Home

• Get pre-qualified before you buy your home, so you know how much you have to shop with.
• Determine how much you can afford to pay each month for your home. You should keep in mind that you will need to pay insurance and taxes on your home as well as any home repairs or improvements you want to make.
• Contact a realtor and begin viewing homes within your price range in the area you want to live in.
• Choose the home that is the best fit for you and your family.
• Make an offer on the home. Your realtor will take you through the negotiation process to get you the best price for your home.
• Get an inspection done of the house. The inspector will look for problems in the wiring, plumbing and building of the home. Request any repairs that need to be made before you finalize the purchase.
• Finish your application for the loan and wait for it to be approved.
• Sign the papers and move into your new home.

Choosing a Mortgage

Finding the right mortgage is an important part of purchasing your home. You should pay attention to the rates, fees and points associated with your loan. The interest rate may be set, which means it will not change once you have taken out the loan or it may be adjustable, meaning they can raise the rate after a certain period of time. If you can qualify for a set interest rate it may save you money, and it is a good option if interest rates are particularly low at the time. There are many fees associated with a loan including the application fee, origination fee, and closing costs. Additionally, you may have the option to purchase points towards your mortgage. These can reduce your interest rate. The Federal Trade Commission recommends that you shop around for several different loans to qualify for the best loan possible. Do not be afraid to ask for better terms or reduced costs.

Warnings

It is important to buy a home you can afford. Many foreclosures happen because people bought houses they could not afford. Ginnie Mae, a government resource for first time homebuyers, provides a calculator to help you estimate how much you can really afford. If you have a large house payment it can cut into your lifestyle and make it difficult to enjoy vacations or other activities with your family.

It is important to have an emergency fund when you purchase this home. The emergency fund can be used to make repairs on your home when things go wrongs, as well as to help cover house payments if you were to lose your job. Many people do not calculate the cost of home repairs into their budget when planning to buy a home, and an emergency fund can make up for any miscalculations.

Conclusion

Buying a home is an exciting step. You need to purchase a home you can afford, so that your mortgage payments do not cripple your monthly budget or make it difficult to pay for the other things you enjoy in life. Finding a good realtor can make the home buying process much easier by finding you the perfect home and explaining each step as you make it.

What does it mean to refinance?

Refinancing is the modification of an existing loan to change the terms, amount, or interest rate.

Reasons to Refinance

• You need some fast cash for home improvement, education, or paying off a car or credit card
• You wish to pay down principal aggressively (and save on interest)
• You want to change the term length of your loan
• You want to take advantage of lower interest rates
• You’d like to consolidate debts
• You want to change from an adjustable rate loan to a fixed rate loan

What are common misperceptions about refinancing?

• You can refinance at any time, anywhere
• You will always benefit from a refinance if interest rates have dropped

The truth is, you will have to qualify for a refinance.  This means that banks can turn you down if you have bad credit, if your home doesn’t appraise high enough, if you’ve been late for payments, and for a variety of other reasons. You are never guaranteed a refinance, and lending laws been much stricter over the past few years.

You should also realize that you will only benefit from a refinance if interest rates have dropped so much that you will recoup the expenses of closing costs over the lifespan of the loan. Always do the math before refinancing your home.

What should you investigate before refinancing your home?

Before refinancing, you should find out how much your home will appraise for.  Compare the currently available interest rates to your current loan rate. Look into the cost and benefits of buying points. You should also explore term options (15-year, 30-year) and available loan types (adjustable rate, fixed rate, balloon). You should also get a copy of your credit report and take action to clean up anything that may be hurting your credit score so you will qualify for the best loans.

Refinancing Terms You Need to Understand

Familiarize yourself with the following terms so you’ll feel confident negotiating with your lender:

Interest Rate – This is the percentage of the loan the bank skims off your loan each month in exchange for lending you the money. Your monthly payments always go first to pay off interest, and principal second. Many people refinance when the Federal government lowers interest rates because they can pay lower monthly payments.

Points – Points are charges you end up paying during a refinance. Each point is worth 1% of your total loan value. You can usually pay points upfront when refinancing in order to get a lower interest rate from the bank.

ARM – ARM stands for adjustable rate mortgage, which is a loan attached to your home’s value that changes over time in accordance with the current interest rate. If your ARM has a balloon, it means it starts out at one (lower) rate, but will increase at a set date in the future. Many people realize they want to refinance just before a loan balloons.

FRM – FRM stands for fixed rate mortgage, which is a loan attached to the value of your home that always charges the same (fixed) interest rate each month.

Closing Costs – These are the expenses associated with refinancing. They can be application fees, appraisal fees, lawyer’s fees, etc. It’s important to compare the closing costs with the anticipated savings of a refinance to make sure you’re getting a good deal.

Refinancing Pitfalls to Avoid

• Refinancing just before moving  (you won’t recoup the closing cost expenses)
• Refinancing when interest rates haven’t fallen sufficiently (won’t recoup costs)
• Assuming a refinance will free up cash (your home may appraise at a low price)
• Refinancing with your current lender (the competition may offer better options)

Helpful Refinancing Tools and Resources

• You can use this refinancing calculator to determine if refinancing will work to your advantage or not.
• Check out this mortgage calculator to figure out exactly what your monthly payments will look like if you refinance at different rates and loan terms.

Refinancing Basics

Now that you’re armed with the essential information, you can determine if a refinance is in your best interest.  Get started on a home refinance.