Table of Contents

 

Introduction

homeownership in the United States Today

The goal of many Americans is to one day own their own home. Homeownership is one of the biggest financial decisions many people will make in their lives, if not the biggest, and so must be considered carefully.

Today, fewer Americans own homes than at any point since 1995, as indicated by the homeownership rate. The homeownership rate is a statistic calculated by the U.S. Census Bureau that measures how many homes are occupied by their owners. As of the end of 2013, the homeownership rate is 65.2%, down from a high of 69% in 2004.

Why do fewer Americans own homes today than they did 10 years ago? Some factors include:

      • Due to the recent economic downturn, some families needed to sell their homes
      • Others may have faced foreclosure
      • In addition, banks and lenders are required to be more careful about who they approve for mortgage loan applications
      •  The urban population is growing, so more people are renting apartments in the city
      • Rents are rising, making it more difficult for people to save for buying homes

Planning Ahead for Homeownership

Buying a home requires a substantial long-term commitment in terms of money, as well as time and effort (both in buying a home and maintaining a purchased home). Additionally, lenders today are stricter about whom they approve for mortgage loans. Prospective buyers must plan ahead so that when they are ready to buy a home, they can prove they have:

      •  A solid credit history
      • The savings required to
        • Make mortgage payments
        • Maintain the house
        • Pay for homeowners insurance

In this Guide to Homeownership, we’ll walk you through the steps of the homeownership process, covering topics including:

      •  The pros and cons of renting vs. buying
      • Understanding what is the optimal financial situation to be in to consider buying a home
      • Working with a real estate agent or broker
      • Finding and choosing a home
      • Financing homeownership
      • Buying homeowners insurance
      • Making a good investment for the future

Considering Homeownership

Renting vs. Buying

Advantages and Disadvantages

[Let’s make a table or graph out of the following]

– Advantages:

      • Renting:
        • Lower housing costs
        • Short-term commitment, so greater flexibility
        • Responsible for little or no maintenance and repair and their associated costs
      • Buying:
        • Usually appreciates in value
        •  Housing costs are more stable from year to year
        • Housing costs can protect against inflation – some mortgage rates are fixed
        • Can save money long-term over renting
        • Housing is stable long-term
        • Tax incentives
        • Builds equity (savings; your house is an asset)

– Disadvantages:

      • Renting:
        • Does not build equity – when you pay rent, that is money gone each month, without the opportunity to appreciate
        • Unstable and rising housing costs – from 2012-2013, rents increased 3.9% on average nationwide
        • No tax incentives
        • Risk of losing housing (for example, owner sells property to another party) or eviction
      • Buying:
        • Long-term commitment, so much less flexibility
        • High up-front costs
        • Typically more expensive than renting
        • Homeowner must pay maintenance and repair costs
        • Homeowners insurance should be purchased
        • Property taxes
        • Risk of foreclosure
        • In case of foreclosure, risk of hurting credit

Resources:

– Is homeownership a good investment? The question is up for debate.

– Find out if you would save money buying vs. renting by comparing the costs using this calculator.

Who Should Consider Buying a Home

The Profile

– Steady income

      • With solid prospects of maintaining or increasing income for years to come

– Healthy savings in cash, assets, or other investments

      • Assets are just as important as cash savings – will need assets as collateral to be approved for a mortgage. Some typical assets are:
        • Stocks
        • Valuables, such as jewelry
        • Other properties

– A good credit history and a good credit score

– Lim ited debts (see Finding What’s Affordable for You [link] to learn more about ideal debt-to-income ratios for obtaining a mortgage)

–  The willingness and ability to stay in a home long-term

Finding What’s Affordable for You

Debt-To-Income Ratio

A primary consideration lenders will use to determine your eligibility for a mortgage, and that you should use in determining your price range for buying a home, is debt-to-income ratio . This is the percent of your monthly net income that goes to making monthly payments on outstanding debts. To learn more about calculating your debt-to-income ratio, see our Guide to Credit Management.

When banks or other mortgage lenders consider a mortgage application, even though a mortgage is secured against the house, they look at an applicant’s income to help offset liabilities. Typically, the highest debt-to-income ratio a mortgage lender will accept is 43%. However, that number varies from lender to lender, and is generally anywhere between 35-45%.

What You Can Afford

To find your price range for a house – and what price range a lender will approve you for – take into consideration three factors:

– Mortgage payment: this includes

      • Principal (down payment)
      • Interest
      • If required,
        • Homeowners insurance
        • Property taxes insurance
        • Mortgage insurance

–  Consumer debts, such as:

      • Credit cards
      • Car payments
      • Student loans
      • Other loans

–  Other debt obligations, including:

      • Alimony
      • Child support
      • Court-ordered repayments

In general, for every dollar of debt a household has, they will need to earn at least double that in gross monthly income to offset the debt when applying for a mortgage loan.

The following formulas take into consideration these three factors to determine what house you can afford.

Front-end ratio:

The front-end ratio is the housing expense, and determines the maximum mortgage payment you can make based on your monthly gross income . Monthly mortgage payments should not exceed 28% of your monthly gross income.

To find your front-end ratio:

Maximum monthly housing expense = monthly gross income x 0.28

For a household with a $5,000 monthly gross income, the maximum they should spend on housing is $1,400/month.

Back-end ratio:

Lenders also consider your back-end ratio, which is the percentage of your monthly gross income that goes to making all your monthly debt payments. Generally, no more than 36% of your gross income should be used to make debt payments.

Maximum debt-to-income ratio = monthly gross income x 0.36

For that same household with a $5,000 monthly gross income, their maximum total debt payments should not exceed $1,800 per month.

Doing the Math

So, what can this household afford? Assuming:

      •  A down payment of $15,000
      •  A 30-year mortgage term
      • A mortgage interest rate of 3.25%
      • No other debts
      • And not taking into account annual property taxes, homeowner insurance, or other expenses

With a monthly gross income of $5,000, this household can afford a home costing about $336,000.

Resources:

– Try out the Home Affordability calculator we used to find how much house this household could afford.

–  Also try this calculator to find out what your mortgage payment will be for homes at different price ranges with different mortgage terms.

Buying a Home

Using a Real Estate Agent or Broker

Many people hire a third-party to help them in the buying or selling of properties. A real estate agent or broker is a trained and licensed professional who can help homebuyers:

      • Find available properties
      • Determine affordability
      • Understand the current housing market
      • Consider the pros and cons of a given property
      • Negotiate the terms of the sale
      • Choose a mortgage and help with the paperwork
      • Consider the property’s potential (and any potential issues) for resale
      • Walk a buyer through the entire home buying process

Real estate agents and brokers typically receive a commission for their services based on the price of the home purchased. Best of all for the buyer, these commissions are paid by the home seller.

Key Questions to Ask When Choosing a Realtor

      • What is your fee?
      • Can you give me a list of services you offer?
      • Do I have a choice in what lenders, inspectors, and other service providers I work with?
      • How quickly can you schedule tours?
      • Do you represent buyers and sellers on the same properties?
      • Can I talk with past clients, or see their reviews of working with you?

Check out this list of 15 Questions to Ask an Agent for tips on what else to ask prospective real estate agents.

Resources:

      •  Find out if a real estate agent’s license is in good standing. Go to your state’s Department of Real Estate website to be sure a potential realtor’s certification is current.
      • For help finding real estate agents and brokers in your area, see our Online Research Tools section .
      • Learn more about realtors, the real estate industry, and the latest news on the housing market.

Choosing a Home

Buying a home is a big, big decision. Finances must be considered, but the determinants in choosing a house within your price range are just as important. Here is some of what to look for when choosing a home.

      • Price of home and potential for appreciation: will the value of your home increase over time? Will it increase enough to offset costs for upkeep, homeowner insurance, and property taxes?
      • Location of neighborhood: is the neighborhood a desirable location? Is it an up-and-coming neighborhood where property values will increase? Evaluate the neighborhood’s
        • Walkability – would a car be a necessity?
        • Density – are there a few houses or rows of apartments?
        • Is it urban or suburban?
        • Parking – is there ample on-street parking? Is it zoned?
      • Quality of construction, age, and condition of the property: what will be the cost of upkeep and maintenance? Are there potential issues with the home’s construction, or with the property itself?
      •  Style of home and lot size: is there room for renovation or expansion on the property? Will this style of home be attractive to other buyers in the future?
      • Number of bedrooms and bathrooms: what size family could live in this home?
      • Quality of local schools: this factor is often important in determining a property’s value and attractiveness to other buyers.
      • Crime levels of the area: is the house in a safe area? How will crime levels affect property values and costs of homeowner insurance?
      • Property taxes: how much will property taxes add to your housing expenses? What is the chance of property taxes rising, and by how much?
      • Proximity: how close is the house to
        • Schools
        • Churches
        • Public transportation
        • Shopping
        • Work

Online Research Tools

There are many online tools and databases available to help find and research real estate agents, brokers, and houses on the market. Here are some of the best and most comprehensive on the internet today, in alphabetical order.

      • HomeFinder: HomeFinder is the affiliate real estate searcher used by over 375 newspapers across the country. HomeFinder can not only help you research listings but also check for open houses and mortgage lenders in your area.
      • Homesnap: While offering a useful online database of listings, the Homesnap smartphone app is really what is noteworthy. Use your phone’s camera to snap a picture of a house you like, then use the Homesnap app to get listing information on the property, and other available properties like it.
      • Realtor.com: Operated by the National Association of Realtors, Realtor.com offers listings for real estate agents and brokers, as well as the properties they represent. The site also offers analysis for larger regions, showing average home prices in the area and how those average prices differ by neighborhood.
      • Redfin: Redfin is an online brokerage firm that currently only operates in select areas. Redfin is dedicated to customer service, and agents are paid on customer satisfaction, not commission. The Redfin website offers virtual tours of properties, research tools, and helps connects potential buyers to their agents.
      •  Trulia: Aside from having an average of 2 million listings nationwide, Trulia is user-friendly and allows house hunters to save and compare favorite listings. Prospective buyers can search for houses on the go using the Trulia smartphone app.
      •  Zillow: Zillow also has a massive database of listings and area data including average prices and mortgage rates. The website also has a discussion forum for Zillow users, allowing homebuyers to get the true scoop on a new neighborhood or a real estate agent.
      • Neighborhood tools: Learn about new neighborhoods with helpful tools including:
        • CrimeReports: curious about how safe a new neighborhood actually is? Use the CrimeReports to find maps of police reports filed in the area.
        • GreatSchools: offers information on public and private schools and school districts, including reviews written by parents and kids.
        • NeighborhoodScout: scout out a new neighborhood by getting crime, school, demographics, and real estate reports from this subscription service.
        • StreetAdvisor: get the true scoop on a neighborhood straight from its residents by using this Yelp! for neighborhoods.

Making an Offer

You’ve finally found a home and are ready to buy. Buying a home is an involved process with several steps, starting with making an offer. Buyers must submit an offer to the seller that may be for well below or well above the asking price, depending on a number of factors.

How to Decide on Your Price

–       Most important in deciding on what price to offer is a comparative market analysis, or CMA . If working with a real estate agent, you can ask the realtor to prepare a CMA for you. The CMA will include the list (asking) and final sale prices for comparable properties in the area, based on criteria including:

      • Square footage
      • Age of home
      • Number of bedrooms and baths
      • Amenities such as pools or guest houses
      • Length of time on the market
      • Property taxes
      • School districts

Every home is different, so by comparing and contrasting the different amenities of the houses sold and circumstances of each sale, you can use this information to help determine a reasonable offer.

–       Other factors to consider include:

      • The market: does the market favor buyers or sellers? Is there a potential bid war for the house (a sellers’ market), or are you one of only a few, or the only one, bidding (a buyers’ market)?
      • Length of time on the market: how long has the house been listed? If for a long time, the seller may be willing to accept a below-asking price offer.

Submitting an Offer

Once you’ve decided on your offer price, you can submit the offer to the seller.

      • It’s good idea to submit a letter in writing to the seller giving an overview of how you arrived at your number. Read this article to see a sample letter.
      • Pre-approval for a mortgage lender is often necessary when submitting an offer. Learn more about mortgages and obtaining pre approval in our Financing Your Home section.
      • You will likely ask for contingencies in your offer, or actions that the seller will need to agree to for you to purchase the home. While contingencies are commonplace, be aware that in some cases having more contingencies can hurt a seller’s chances of accepting your offer. Contingencies may include:
        • Home inspection
        • Repairs and maintenance
        • Pest control
        • Sale of your current property

If your offer is rejected, the seller may propose a counter-offer detailing new terms for a sale, usually some kind of middle-ground between your offer and the asking price.

If the seller does not make a counter-offer or sells to another buyer, it’s time to continue the housing search anew.

Closing on a New Home

After a seller accepts your bid on a house, there’s one more step before you become the owner, and that is the closing, which usually takes place 45-60 days after a price and terms are agreed upon.

Before the closing, certain events and actions must take place, usually including:

      • Home inspection by a licensed inspector
      • Home walk-through after the seller has completely moved out
      •  A good-faith deposit, which the seller will receive after closing, is placed in an escrow account
      • Finalized mortgage terms with the lender
      • The buyer should purchase homeowner’s insurance
      • Any and all other contingencies from the accepted offer completed

The closing is an event involving buyer, seller, and representatives (such as real estate agents and/or lawyers) for both parties, and ends the buying/selling process for all parties. The buyer and seller will complete paperwork finalizing the sale, and all fees expected to be paid will be completed.

The closing really completes two transactions: the purchase of the home and the completion of the mortgage loan. For an in-depth look at what to expect at your closing, what to bring, and how to prepare, read this article on Closing on a House for the Buyer.

Financing Your Home

Mortgage Basics

What it is: A mortgage is a long-term loan used to buy a house or property.

What the terms are:

      • A mortgage is secured against the house or property being bought. The house is held as collateral; if the homeowner stops payments or otherwise defaults on the loan, the lender assumes ownership of the house and it is the lender’s right to evict tenants, sell the house, and/or take other action. This is called foreclosure.
      • A traditional mortgage is a “fixed-rate” mortgage, meaning the interest rate on the loan stays the same throughout the terms of the mortgage.
      • Mortgages typically have terms of 15 or 30 years, meaning the borrower will make monthly payments for 15 or 30 years to pay off the principal and interest. After that, they fully own the house or property.

Applying for a Mortgage

Pre-qualification vs. Pre-approval

When shopping for a mortgage, many consumers confuse pre-qualification with pre-approval. This is an important difference to understand because in most cases pre-approval on a mortgage is needed to close on a house or property.

–  Pre-qualification:

      • The first step in the mortgage process
      • A quick procedure that can be done over the phone or online
      • Creates initial contact between borrower and lender
      • Borrower gives lender an overview of their financial situation, including
        • Income
        • Credit
        • Assets
      • Lender gives borrower estimates of mortgage rates and suggests different options, if any
      • Does not include an analysis of your credit report
      • Does not mean you have obtained or will obtain approval on the mortgage
      • Typically free

– Pre-approval:

      • The next step after pre-qualification
      • An in-depth process that often requires face-to-face meetings
      • Involves a thorough analysis of credit history, income, and assets through
        • Official credit report
        • Bank statements
        • Other documentation
      • Means that the lender is ready to give the borrower a mortgage loan, pending the closing of the house or property
      • Lender and borrower agree on mortgage terms, including length, monthly payment amounts, and interest rates
      • Pre-approvals are typically valid for 120 days
      • Borrower is often charged a fee for pre-approval

Shopping for a Lender

Prospective homeowners looking for a mortgage to finance a new home can obtain a mortgage in one of two ways:

– Directly from a lender, including:

      • Bank
      • Credit union
      • Mortgage company

– Through a mortgage broker, or an agent that searches for and arranges mortgage transactions

Regardless of whether you work through a broker or directly with a lender, here are some tips to finding a lender and the best mortgage terms for your household.

– Find a lender or broker that you are comfortable working with. Find an agent who:

      • Helps educate you on the ins and outs of the mortgage process
      • Explains loan prices, interest rates, and all fees.
      • Honors rates quotes
      • Offers different choices and explains the pros and cons of each
      • Responds promptly to calls

– Ask your real estate agent for a short list of lenders they recommend. Real estate agents cannot receive referral fees from lenders, so any lenders they recommend are ones they like working with, trust to be fair, and help close loans promptly.

–  Pull up your credit history and know your credit score. Use this information to help compare terms and rates, knowing that the better your credit history, the more favorable terms you can (and should) receive from lenders.

–  Learn all the fees associated with your loan, and any fees your broker may charge if you are working with one. Many of these fees are negotiable. Some standard fees to be aware of include:

      • Broker fee or commission
      • Underwriting fees
      • Closing costs

–  Some of the sites mentioned in our Online Research Tools [link] section – including Trulia and Zillow – offer user-generated reviews of lenders and brokers. Use these reviews from borrowers just like you to get the real scoop on the lenders and brokers you are considering.

– Above all, shop around. Compare rates and fees between lenders, or compare the options one broker presents with those of another.

Resources:

–  For more in-depth tips on shopping for lenders, see this Federal Trade Commission guide to Shopping for a Mortgage.

–  Here are 5 more tips for Shopping for a Mortgage.

– It is illegal for mortgage lenders to discriminate against prospective borrowers. Learn your rights regarding what lenders can and cannot consider in your application, and how to file a complaint if you feel you’ve been discriminated against.

– Be wary of ads offering low rates or payments. The FTC points out what to watch out for – and what the ads don’t tell you – in Deceptive Mortgage Ads.

Applying

What Lenders Look For In Your Application:

–  The Four C’s:

      • Capacity – Your current and future ability to make payments, and make them on time
      • Capital – Your cash savings, as well as any assets or investment you have that can be sold quickly for cash
      • Collateral – The house or property you are looking to purchase
      • Credit – Your past history of paying bills and making debt payments in full and on time

Paperwork Checklist:

      • W-2s (from the last 2-4 years) and pay stubs (last few months)
      • Bank statements for all accounts
      • Investment statements
      • Personal tax returns
      • Business tax returns (if applicable)
      • If self-employed or a business owner, recent profit/loss statements
      • Personal identification (such as a driver’s license or passport)
      •  If currently renting, proof that last 12 months’ rent was paid on time
        • Canceled rent checks for last 12 months; or
        • Bank statements for last 12 months
      • Completed mortgage application
        • You may have filled out portions of the mortgage application when applying for preapproval

Steps to Expect:

After receiving pre-approval and completing your application:

      • The lender will review the application
      • The lender will conduct a home appraisal on the house or property, basically to make sure that if you default on your mortgage payments, they will be able to recoup the value of the mortgage by selling the house
      • The lender will verify that you have the funds to pay for upcoming expenses including:
        • Down payment – the amount of money you have to pay up front to buy a house or property. This is typically 15-20% of the house or property’s total value
        • Closing costs
        • Reserves – many lenders require borrowers to set aside the value of 2 monthly mortgage payments in case of emergency
      • If everything checks out, the lender will issue a Commitment Letter. This letter details the terms of the loan approval in writing and assures that you will receive the financing you need to buy a home

Conventional Fixed Rate

What It Is:

      • The traditional mortgage. Usually, when people are discussing mortgages, they are talking about conventional fixed rate mortgages
      • When the mortgage application is accepted and terms are agreed upon, the interest rate set at this time stays the same throughout the terms of the mortgage (typically 15 or 30 years); the rate does not fluctuate, no matter how much rates rise or drop during this time

Pros:

      • The interest rate stays the same throughout the terms of the mortgage
      • Monthly payments are always the same throughout the terms of the loan
      • A good mortgage type for someone who plans to remain at the house or property long-term

Cons:

      • If interest rates decrease, you’re stuck paying a higher rate

Adjustable Rate Mortgage (ARM)

What It Is:

      • With an Adjustable Rate Mortgage (ARM), the interest rate adjusts to market conditions at periodic intervals
      • ARMs may offer low introductory rates in exchange for the rate adjustment at a later time
      • Rate caps are usually put in place so the rate cannot increase or decrease by more than a predetermined percentage over a given period of time
      •  Also known as a Variable Rate Mortgage

Pros:

      • Typically, low introductory interest rate
      •  Interest rates have a chance of decreasing, based on market conditions
      • A good mortgage type for someone who plans to remain at the house or property short-term

Cons:

      • Interest rates will increase after introductory period
      • Interest rates may rise periodically, and so will monthly payments
      • Monthly payments are harder to predict, which can affect budgeting

Resources:
– Learn more about Adjustable Rate Mortgages in this Federal Reserve Board Consumer Handbook.

Hybrid Adjustable Rate Mortgage

Pros:

      • Fixed introductory rate
      • After reset date, interest rate may adjust lower than fixed rate

Cons:

      • Interest rates may increase after reset date
      • The adjustable period is typically much longer than the fixed rate introductory period
      • Makes it more difficult to budget long-term

Government Mortgage

What It Is:

–       A government mortgage can assist qualified households obtain better interest rates with fewer fees, or help obtain loans for those who may not qualify for traditional lenders.

–       Some common government mortgages are:

      • FHA (Federal Housing Administration) Loan
        • FHA Loans are mortgages that are insured by the Federal Housing Administration
        • Borrowers pay for mortgage insurance, which protects the lender in case the borrower defaults
        • Because of the mortgage insurance requirement, lenders may offer FHA loans with
          • Attractive interest rates
          • Low down payments
          • Loan can include some closing costs
          • Relaxed qualification requirements
        • Learn more about FHA loans and what they can do for you.
      • VA (Department of Veterans Affairs) Loan
        • Created after World War II to help returning service members purchase homes
        • The VA Loan is a mortgage loan guaranteed by the federal government, meaning the government will protect the lender from loss if the borrower defaults on payment
        • Favorable terms for active military personnel, veterans, and their families, such as
          • Low or no down payment
          • Low interest rates
          • No mortgage insurance requirement, so no monthly premium payments for the borrower
        • Visit the VA’s website to learn more about Home Loans and how to get your benefits.
      • RHS (Rural Housing Service) Loan
        • Helps low- and moderate-income families buy single-family homes in rural areas
        • Applying family must live in home being financed
        • The government guarantees this loan. Benefits for applicants include
          • No mortgage insurance required
          • No down payments
          • Loan can cover closing costs
        • To learn more about the different kinds of RDH loans and RDH programs offered, visit their website.

Pros:

      • Favorable terms that may include low down payments and low interest rates
      • Guaranteed by the federal government or government programs
      • Allows households to be approved for mortgage loans who may not be approved by a traditional lender

Cons:

      • Loan eligibility may only be for certain people designated by income level, military service, or location
      •  The size of the loan may be limited
      • The kind of house or property the borrower is able to purchase may be limited

Interest-Only Mortgage

What It Is:

      • For an interest-only mortgage, the borrower only pays the interest on the loan for a designated period of time
      • After that time is up, the borrower has options:
        • Can enter into a normal mortgage, paying principal and interest
        • Can pay a lump sum

Pros:

      • Less cost in initial period
      • Allows payment to be deferred until income increases
      • May be a good mortgage for young, first-time homebuyers

Cons:

      • Typically has higher interest rates than a conventional mortgage
      • When initial period is over, could mean entering into more debt to make payments
      • Can be more difficult to budget for long-term

Jumbo Loan

What It Is:

      • When a family seeks to buy a large house requiring a large loan, they will need to secure a jumbo loan.
      • A jumbo loan is one that exceeds the conforming loan limit, which is currently $417,000 for all states except Alaska and Hawaii (where it is $625,000).
      • Because of the large loan amount, jumbo loans carry higher interest rates than conventional mortgages
      • Jumbo loans also have strict qualification requirements

Pros:

      • Allows for loans on large amounts above the conforming loan limit

Cons:

      • High interest rates
      • Strict qualification requirements

Understanding Your Mortgage

Reading Your Monthly Statement

[Can we use this sheet, or make one like it? http://www.makinghomeaffordable.gov/learn-more/mortgage-statement/Documents/example_mortgage_statement.pdf]

Understanding Amortization Schedules

Amortization schedules break down the schedule of payments for a mortgage, from the first payment to the last. When looking at an amortization schedule, it will show:

      • The amount of principal paid each month
      • The amount of interest paid each month

Typically, a borrower will pay mostly interest at the beginning of a mortgage, and more principal towards the end of the mortgage’s terms.
Say you’ve taken out a mortgage with:

      • A loan amount of $300,000
      • An interest rate of 5%
      • A 30-year term

Using an amortization calculator, this mortgage has:

      • A monthly payment of $1,610.46
      • A total of $279,767.35 in interest paid – nearly as much as the loan itself!
      • A total of $579,767.35 paid, including principal and interest

[Build out sample graphic of first 10 years or so]

Refinancing

If you’ve had a mortgage for a number of years and have found that interest rates have dropped, you’re not out of luck. It is still possible to get a mortgage at better terms through refinancing.

Essentially, when you refinance your mortgage, you pay off the existing loan and start a new one.

Benefits of Refinancing

Depending on a borrower’s needs, refinancing a mortgage can do any or some combination of the following:

      • Lower interest rates
      • Increase the terms of the mortgage to reduce monthly payments
      • Reduce the terms of the mortgage to reduce interest accumulated
      • Switch from an adjustable rate mortgage (ARM) to a conventional fixed rate mortgage
      • Negotiate better terms on an ARM

What to Be Aware of

      • Refinancing is an in-depth process similar to applying for a mortgage
        • Refinancing requires an application and lender approval
        • Lenders will check your income and credit history
      • There are costs and fees associated with refinancing that may outweigh lowered interest rates or better terms
      • Your current mortgage may have a prepayment penalty, or fine for paying off your mortgage early. This includes refinancing
      • If you are nearing the final years of your mortgage terms, refinancing may not make sense
      • If you are planning to move in the near future, it may not be worthwhile to refinance

Resources:

Homeowners Insurance

      •  Homeowners insurance protects homeowners from both liability and property costs, such as damage and replacement.
      • Homeowners insurance, and sometime specific types of homeowners insurance (see Different Types of Coverage), may be a requirement from a lender for securing a mortgage.
      • The homeowner makes monthly payments on the premium, or cost of the insurance.
      •  In case of loss or accident, the homeowner files a claim with their insurer. Then, typically after paying a deductible, the insurer provides the monetary means to make repairs, replace items, or cover costs associated with personal injury.

Resources:
–  For the complete ins and outs of homeowners insurance, read this guide prepared by the National Association of Insurance Commissioners (NAIC).

What It Covers:

Homeowners insurance policies typically cover:

– Dwelling: Costs to repair or rebuild your home including

      • Plumbing
      • Electrical wiring
      • Heating
      • Air conditioning

– Other Structures: Costs to repair or rebuild other structures on the property including

      • Garages
      • Fences
      • Sheds
      • Cottages/guest houses

– Personal Property: Costs to repair, replace, or reimburse for the damage or destruction of personal property, such as furniture, electronics, and valuables, from

      • Theft
      • Damage caused to the house

–  Loss of Use: Costs from having to move out of your home while a repair or rebuild is occurring

      • Hotel
      • Renting another property

–  Liability: Covers costs if someone is hurt on your property, including

      • Medical bills
      • Legal fees
      • Other restitution

Different Types of Coverage

– Basic homeowners insurance:

      • There are generally three tiers of basic homeowners insurance: HO-1, HO-2, and HO-3.
      • HO-1 is bare bones insurance that has been discontinued in some states.
      • HO-3 offers the most comprehensive coverage and is the most common tier of homeowners insurance.
      • The more a policy covers, the higher the premium will be (i.e. the more the policy will cost.

Resources:

–  For an idea of what might or might not be covered under HO-1, HO-2, and HO-3, check out this table from insurer Progressive.

–  Additional homeowners insurance:

      • Basic homeowners insurance most likely does not cover households for damage caused by natural disasters such as:
        • Earthquake
        • Flood
        • Tornado
        • Hurricane
        • Mudslide
      • Insurance covers these occurrences costs extra and may need to be purchased from a different insurer
      • If living in an area often affected by these kinds of occurrences, the purchase of a specific kind of natural disaster insurance may be a requirement of your mortgage

What It Costs

The cost of homeowners insurance varies by the value of the home being insured. In general, the cost of an insurance premium for a home can be found by:

      • Taking the value of the home
      • Dividing by 1,000
      • Multiplying that result by $3.50

For a home worth $300,000, the annual insurance premium would be about $1,050.

Of course, the cost of homeowners insurance is higher or lower depending on the amount of coverage and the different kinds of areas covered. Insurers typically take into account:

      • The cost to rebuild your home
      •  How close your home is to fire stations and other emergency resources
      • The age and condition of your home
      • If there are any high-risk amenities on the property, like a swimming pool or trampoline
      • What kinds of pets you own – insurers may charge higher premiums for certain breeds of dogs or for exotic pets, like snakes or birds

Resources:

–  There are ways to Lower Your Homeowners Insurance Costs. Read about them in this guide from the Insurance Information Institute.

Selecting An Insurance Company

      •  If you already have car insurance or other types of insurance, your insurance company may also offer homeowners insurance. Check with them to see if you can bundle insurance deals and save money
      •  When shopping for homeowners insurance, you’ll definitely want to get quotes and compare rates. Try databases like InsWeb and Affordable Home Insurance to get and compare quotes.
      • Read this CNNMoney article for tips on Picking a Home Insurance Provider.

Maintaining Your Policy

Once you’ve been approved for a homeowners insurance policy, your work is not over. Negligence on your part can lead to the insurer declining to renew your policy once the terms are up or canceling the policy. To maintain your policy, be sure to:

      • Pay your premium on time. Every time.
      •  Maintain your home. Homeowners insurance does not pay for the upkeep of your house, and negligence on your part to the upkeep could void the terms of your insurance, preventing you from making a claim. Save yourself time and money later by repairing and replacing items as they need your attention.
      • Keep an inventory of your possessions, noting jewelry, antiques, expensive furniture and appliances, electronics, and other items of note. Keep a copy of this list offsite so you can make claims on those items in case of theft, disaster, or other incident.

Filing a Claim

If a tree falls through your roof, a burglar takes a laptop, or your teenage driver backs through the garage door, you will want to file a claim with your insurance company.

      • Contact your insurer right away. Your insurer most likely has a 24-hour hotline for filing a claim. Give them a call, and then respond to further calls from your claims adjuster, or the insurance agent you will be working with throughout the claims process.
      • At the time of the incident, take photos of all damage and get contact information from any witnesses, if applicable.
      • Do your best to protect your home from further damage. Board up broken windows and clean up any standing water, for instance.
      • Review your policy to make sure you know what will be covered and how much, and what you will be contributing from your own pocket to pay the deductible.
      • Most likely, an adjuster will arrive onsite to assess damage. Do a walk-through with the adjuster, take notes, and keep records of your conversations.

Canceling or Losing Your Insurance

Typically, after a 60-day trial period, the insurer has the right to cancel your insurance before the policy expires, or choose not to renew your policy at the end of its term.

      • The insurer must give you notice when canceling or choosing not to renew your policy. The number varies from state to state, but is usually around 30 days.

An insurer can cancel your homeowners insurance policy for:

      • Late or missed payments
      • Illegal activity occurring in your home or on your property
      • Negligence to the house or property
      • Changes to the house or structure that would void the policy, such as
        • Structural changes without a permit or that do not adhere to local building codes

What To Do

      1. Ask your insurer why they are canceling or choosing not to renew your policy.
      2. Address any concerns listed, such as structural issues or maintenance needed.
      3. Begin shopping around for a new policy.
      4. Some homeowners in risk areas (like hurricane zones) may find it difficult or impossible to find insurance. In this case, you will need to buy insurance through a state pool under the FAIR (Fair Access to Insurance Requirement) Plan. Visit your state’s insurance commission website to learn more.