I read a good article on Yahoo! Finance today about “homeowners’ fears” and what actions to take to deal with them. The advice was fairly basic, but it’s nice to get a reminder every once in a while. The first point made in the article, about having a home inspector take a look at your house to help you put those nagging concerns about structural integrity behind you, is fine - but only if you don’t have a great deal of experience in dealing with such things. Once you’ve owned a home for a few years, you quickly become privy to the pitfalls that come from letting things go. So unless you’ve moved into a house with a “new feature”, e.g. - you have a heat pump for the first time after having a forced air gas furnace for years, you can probably figure things out for yourself. If, however, you have no confidence in your abilities to assess problems with your home, by all means hire an inspector to help point out what may be wrong with your home and what you can do to fix the problems.

More relevant, I thought, was the point made in th article about insurance. Now, I generally think of insurance as a racket (and don’t get me started on PMI). But the fact is that even if your lender didn’t require homeowner’s insurance, you would still be unwise not to insure and, since one’ s home is often his greatest asset, it’s generally a good idea not to skimp when it comes to homeowner’s insurance.

The housing boom has lifted home values 51 percent over the past six years. For most of us that means that if our house was destroyed, insurance would pick up only a portion of the cost to rebuild.

And speaking of PMI, the article makes a good point about that as well.

If you bought after July 1998 with less than 20 percent down and had to get private mortgage insurance, your lender must automatically cancel your PMI once you’ve paid off 22 percent of the loan. But price appreciation may help you hit the target earlier. This annoying fee can run $16 to $50 a month for every $100,000 of debt. However, before you pay $300 or so for an appraiser to prove that your home’s greater value has pushed your equity higher, understand what it will take to waive PMI. Mortgage terms vary.

I actually have a story about that. PMI, or “private mortgage insurance” is a fee paid by YOU, the borrower, on behalf of the LENDER. It’s there so the lender has an assurance that if you default on the loan, they’ll still get paid. Why this is required of borrowers, I don’t know, since it is for the benefit of lenders…but I digress. My own experience with PMI is that I’ve avoided it by always putting 20% down or having an 80/15/5 or 80/10/10 financing arrangement, through which I would put 5 or 10% down and finance the remainder of the home purchase price with a primary mortgage (80%) and another smaller mortgage that constituted the 10-15% needed to meet the home sales price.

In one instance, however, I purchased a house in Salisbury, Maryland with my brother and we subsequently rented it out. He personally took care of the financing, though we own the house together. Because he originally purchased it with an FHA mortgage (putting 3% down), we also paid PMI. He lived in the house for several years, but after he moved out we began renting it to local college students and, at the same time, re-financed the original mortgage. Again, he took care of the financing and, unbeknownst to me, this still included a PMI payment. After taking over control of the finances a few months ago, I saw the charge for PMI ($32 per month, paid to a company called “Genworth”).

I called Wells Fargo, the mortgage company with which we financed this house, to see what was up and was informed that the loan to value (LTV) was at about 81%. Greeeaaat…I thought. Long story short - we were still able to get rid of this entirely useless PMI “service” and the fee by paying $150 for a “broker’s appraisal”. What’s that, you may ask? Quite simply - a real etate agent familiar with the area goes to the house, takes a look around and lets the lending company know how much he or she would list the house for if it were to be sold. The result of this particular broker’s appraisal was to reduce the effective LTV to about 53%. It will take us 5 months of not paying PMI to cover the cost of the appraisal which is, of course, well worth it (even though the “broker’s appraisal” is something of a racket as well).

Tags: genworth, homeowners insurance, loan to value, ltv, maryland real estate, mortgage insurance, pmi, real estate investment, rental property, salisbury real estate

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