Mortgage & Insurance


Most people shop for a home before they shop for a mortgage. But, really, first you need to know how much of a mortgage you can afford, and then look for a home that can qualify for the mortgage you can afford. Consequently, it’s best to pre-qualify for a home mortgage before you start looking seriously at houses, let alone make an offer on one.

Mortgages come in many variations, with a number of different options, so you should consult a lending professional to help you choose the right loan for your personal circumstances. Here’s a quick overview of two common types of mortgage loans:

Types of Loans

Fixed Rate — Your monthly payment—a combination of principal and interest—remains the same throughout the life of the loan and cannot be changed. The stability of a fixed rate loan is attractive, but there’s a tradeoff: you’ll pay a slightly higher interest rate for a fixed rate loan than for an adjustable rate loan.

Fixed rate mortgages are usually offered in 30- and 15-year terms. A 30-year mortgage will cost less per month, but you will pay more in interest over the life of the loan. If you can afford the monthly payments of a 15-year loan, you will own your home in half the time and pay thousands of dollars less in interest.

Keep in mind, however, that while a shorter term loan will save you money in total costs, you’ll have a smaller income tax deduction for mortgage interest. Another disadvantage to a fixed rate loan is that you will need to refinance to take advantage of falling interest rates.. Refinancing involves additional paperwork and costs.

Adjustable Rate — An adjustable rate mortgage (ARM) begins with a lower rate for a specified number of months, which then fluctuates according to an index, such as the performance of the 30-year Treasury Bill rates or the LIBOR. Rates may increase every year, but most ARMs have a cap on how high the rate can go.  If interest rates go down, the ARM goes down as well, which eliminates the hassle and costs of refinancing to take advantage of lower rates.  People choose the ARM because it allows them to purchase a home they may not otherwise be able to afford. The drawback is that if your income doesn’t increase as you expect, or the value of your home decreases, you may be in a position where you can’t afford your mortgage, and selling the home at a loss may not cover your mortgage obligations.

How Much Down Payment Do You Need?
The rule of thumb for down payments used to be 20% of the appraised value of a home. That can add up to a lot of money, especially for a first-time home-buyer.  Fortunately, Private Mortgage Insurance (PMI) insurance purchased by the home-buyer that protects the lender in the event of a default on the loan, which enables you to put less than 20% down to qualify for a mortgage, because it eliminates risk for the lender. The downside is that PMI is expensive — for example: in most cases, buyers can discontinue paying on PMI when their equity in their home reaches 20%.

What Are Points?
Points (also variously referred to “loan-origination fees,” “discount fees,” or “buy-down charges”) are fees that lenders charge up front in exchange for a lower interest rate over the life of the loan. You can usually expect to reduce your interest rate by ¼ to 1/8 of a percent for every point you pay.

One point is equal to 1% of your loan amount. So, if you’re borrowing $150,000 and have to pay one point in fees, it costs you $1500. Like annual mortgage interest, points are 100% tax deductible in the year that you pay them.

Insurance Basics

Basics Homeowners Insurance – You need to secure homeowner’s insurance in order to get a loan to buy a house. But a homeowner’s policy can covers more than just the structure itself.

Policies vary widely, but in general, homeowner’s insurance covers the following areas:

Your Home
 – Protects your home against damage from fire, wind, smoke, lightning, theft, vandalism and just about anything else that isn’t specifically excluded. Common exclusions are flood and earthquake damage, but you may be able to buy additional coverage for these if desired or required.

Your Possessions — Your belongings are also covered under your homeowner’s policy, including losses that happen away from home, (e.g., if your smartphone or camera is stolen while on vacation). Keep an inventory of everything you own so any claims can be handled accurately and efficiently. Write down serial numbers as well as the date of purchase and original cost of the items, or document it on video. Keep the inventory in a fireproof safe or somewhere outside your home where it can be accessed if your home should be destroyed.

Liability — Protects you against lawsuits arising from damage you, your family members or your pets may cause to other people. Pays not only for the actual damage, but also for the cost of defending you in court and for any court-ordered damage payments.

How much will your insurance cover in the event of a loss? It depends on how your policy is written. There are several features to consider:

Replacement Cost Coverage
 – Covers the costs to replace the property with an identical or similar item. For example, if your bicycle is stolen from your garage, your insurance pays to replace it with a new bicycle of the same or similar make and model (less your deductible).

Actual Cash Value – Pays what it costs to replace the property with an identical or similar item, once that item has been devalued for depreciation.  Instead of paying for a new bicycle that was stolen, your insurance would give you the cash value of a used bicycle of the same make and model that was stolen (less your deductible).

Extended Replacement Cost — This type of coverage applies only to the structure of your home and isn’t always  exactly a total “replacement.” You’re covered only up to set limits, which may not be enough to pay for the entire value of your home. If you want the assurance that the full replacement value of your home would be paid in the event of disaster, ask for “guaranteed replacement cost.”

If you’ve purchased a condo, or townhouse, ask your insurance agent about specific homeowner policies designed for these types of homes. You’ll want to purchase coverage above the association policy, but the additional coverage is usually very affordable.

An insurance agent can help you determine how much and what type of coverage is right for your family and your new home. Be sure to ask what discounts may be available, such as rate reductions for smoke alarms, fire extinguishers, security systems and nonsmoking households.

After purchasing your homeowner’s insurance, make it a practice to review your coverage every year to be sure that it’s keeping up with increasing real estate values and any additions or improvements you may have made.