Home Ownership FAQs
1. When should I refinance my home?
If interest rates have recently dropped dramatically or if you currently have an adjustable mortgage, you may want to consider refinancing. When you refinance, you are basically starting from scratch and applying for a new loan. Whether you choose to refinance with your current lender or work with a new lender, your new home loan will pay off the old home loan, and you’ll make payments according to the terms of the new loan. That means you’ll have to pay some closing costs, which can sometimes be very expensive.
Here are a few scenarios when it might make sense for you to refinance:
- You can get a significantly lower interest rate.
- A new loan will lower your monthly payment.
- You can shorten the term of the mortgage, which will allow you to build equity faster.
- You have an opportunity to switch from an adjustable rate to a fixed-rate mortgage.
What it comes down to is this: if refinancing will save you money in the long run (even if you just secured a new mortgage), you should strongly consider it.
2. Which upgrades will add the most value to my home?
Research shows that you’ll get the most bang for your buck with the following home improvements:
- Kitchen renovations
- Bathroom remodeling
- Home-office additions
- New upscale siding
- Wooden deck additions
- Finishing a basement
3. Which upgrades will not add value to my home?
Experts say these upgrades aren’t worth the hassle:
Excessive improvements: You should never make extreme upgrades that greatly exceed competing properties in your neighborhood. While you want your house to be appealing and stand out from other houses on the market, don’t overdo it. You shouldn’t outshine your neighbors so much that your home seems out of place. Find out how other homes in your neighborhood are designed, and make improvements based on your specific marketplace.
Swimming pools While many homeowners believe a swimming pool will add value to their home, this is simply not the case. First of all, it usually costs a small fortune to install an in-ground swimming pool. Secondly, you’re probably not going to recoup your investment because many homebuyers view an in-ground swimming pool as a high-maintenance hassle. However, if you live in a place where it’s warm almost year-round, such as Florida or California, an in-ground swimming pool may be viewed as a plus. But if you live anywhere else, you’re better off without it.
Converting a garage Before you consider converting your garage into an office or extra bedroom, take a look around. If every other home in your neighborhood has a two-car garage, you probably shouldn’t get rid of yours. Many homebuyers would rather have a sheltered place to park their car than an extra bedroom.
4. How can I avoid foreclosure?
When it comes to your credit history, foreclosure is one of the most damaging offenses. That’s why you should avoid foreclosure at all costs. First and foremost, you should always pay your monthly mortgage payment in-full and on-time. Lenders usually initiate foreclosure proceedings once you have missed three payments. If you fail to pay three payments in a row, you’ll probably receive a letter from your lender saying that you are in default. At this point, your lender can request a trustee’s sale of your home or a judicial foreclosure, which means your home will be sold at a public auction.
To prevent this from happening, you should pay the overdue amount as well as the next mortgage payment as soon as possible. Be sure to submit this payment at least a few days before your property is scheduled to sale.
If you do not pay the overdue amount on time and your home sells, the new owner may be able to move in immediately. If you refuse to leave your home, you could be evicted by the police.
5. What tax benefits are available to home owners?
Home owners can benefit from a number of valuable tax advantages. First and foremost, you will receive the mortgage interest deduction. As part of this deduction, you can deduct interest paid on your mortgage loan up to $1 million. This includes loans to buy, build or improve your primary residence as well as a second home.
Additionally, in the year you purchase your home, you can deduct any points you pay on a new mortgage loan for your home purchase or improvements. You can also deduct property taxes, including those levied by state and local governments and school districts.
If you relocate for a new job that’s at least 50 miles away, you may also be able to deduct some of your moving expenses.
Talk to a financial advisor or tax expert to find out which tax deductions you might be eligible for.
6. Should I try to pay off my mortgage?
If you have a fixed-rate mortgage with a low interest rate, most financial experts say it’s better not to pay off your mortgage. First of all, your fixed monthly payment will become an increasingly better deal as the years pass and inflation increases. You’ll also benefit from deducting mortgage interest on your income taxes.
When you prepay your mortgage, you’re basically investing in your house. As an investment, your house earns a meager 4% or so a year, it’s extremely non-liquid and the transaction costs to sell it are phenomenally high. In other words, your house is a poor investment.
Plus, when you put all of your extra money into paying off your mortgage, you may have nothing left to contribute to other investments. Because financial experts say it’s important to have a diversified portfolio, this goes against the basics of smart financial planning.
In the long run, paying off your mortgage isn’t going to add to your wealth—and it can actually subtract from your potential wealth because you could be putting that money into more valuable investments.
7. Do I need condo insurance?
Although your condominium association probably offers a “master” insurance policy that covers the building and commonly owned property, this insurance does not protect your particular condo or your belongings. That means if a burglar breaks into your condo, a fire causes smoke damage to interior walls of your unit or a visitor falls and hurts himself inside your home, you will not be covered by your condominium’s general insurance policy. This is exactly why you need your own condo owner’s policy.
The type of coverage you need greatly depends on your unique situation. However, you’ll definitely want to protect yourself against theft, damage and personal liability incidents. Depending on where you live, you may also need flood insurance or other special coverage. A professional insurance agent can help you figure out exactly what kind of coverage you need.
8. Do I need flood insurance for my home?
The average homeowners insurance policy does not cover flood damage. You have to buy a separate flood insurance policy to cover this risk.
According to FEMA, every property owner needs flood insurance. The government only provides Federal disaster assistance if the area where the flood occurs is officially deemed a disaster area. Plus, even when the government does provide financial assistance to families in a disaster area, it’s not a payout—it’s a loan that must be paid back, interest included.
The price tag on flood insurance varies, ranging from $223 to $3,000 a year. The price you pay depends on where you live, the size and condition of your home and what type of coverage you want.
Through the Federal program, $250,000 is the maximum amount of money you can receive to rebuild the structure of your home. However, private flood insurance companies can cover far beyond that amount.
However, flood insurance is only available in communities where “the appropriate public body has adopted adequate floodplain management regulations for its flood-prone areas.” So, before you start shopping around for flood insurance, you should makes sure your community is covered.
9. How can I find a trustworthy contractor to work on my home renovations?
If you’re planning on hiring a contractor to work on your home renovations, don’t just hire the first company you find in the phone book. Ask your friends, family members and real estate agent for recommendations. Before you hire anyone, call your state’s licensing board for contractors. Ask them if the contractor in question has any complaints against him. You should also check with your local Better Business Bureau office.
You’ll also want to make sure the contractor has general liability insurance as well as workers’ compensation for each of their employees. Ask the contractor to show you a certificate of insurance to make sure they are covered.
While you may be tempted to hire a cheaper contractor who doesn’t have insurance, remember that you’re taking a huge risk by doing so. If something goes awry during the project, you could be stuck with a hefty bill. On the other hand, when you hire an insured contractor, you will not be held liable if a worker is injured during the project. Plus, you’ll be covered if the contractor causes any damage to your home during the project.
10. Do I need building permits for my renovation project?
Depending on where you live, you may need to obtain building permits before you begin your home renovations. Typically, permits are required if you are altering the structure of your home, such as adding on a room or a deck. Contact your city or county government offices to find out whether or not your home improvement project requires a building permit.
If a building permit is necessary, you or your contractor will need to apply for the permit and adhere to the specified building codes. Once the job has been completed, a building inspector will come by to check out the renovations and ensure that everything is up to code.
It’s extremely important to obtain the proper permits when necessary. If you add a room to your home and it does not meet your local government’s building codes, your insurer may not cover the extra room.