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Selecting the proper amount of coverage is the single most important decision you can make with your Homeowners policy. Without it, you may not have enough coverage to rebuild after a total loss. This is called “insurance to value.” Below are some explanations and tips to help you make the right choices for your needs — and remember, if you need help, we are just a phone call away!

What is insurance to value?

Insurance to value is the relationship between the amount of coverage selected (typically listed as “Coverage A” or “Dwelling Coverage” on your policy declarations page) and the amount required to rebuild your home.  Insuring your home for anything less than 100% insurance to value could mean you wouldn’t have enough coverage to replace your home in the event of a total loss.

Why is the cost to rebuild different from the market value?

A home’s market value reflects current economic conditions, taxes, school districts, the value of the land and location, and other factors unrelated to construction cost.  The cost to rebuild your home is based only on the cost of materials and labor in your area.  It is important that you insure your home based on its reconstruction cost, NOT its current market value.

Why is reconstruction more expensive than new construction?

New-home builders typically build many homes at once and solicit bids from various sub-contractors to receive the best pricing. Their business model is based on economies of scale. For example, they may purchase 20 bathtubs at once, securing a lower unit cost. These economies of scale do not exist when building a single home.

How can I make sure I have the correct amount of insurance?

As an independent agency, Columbine Insurance Group offers a choice of carrier’s options, free consultation, and personal service. They can be reached at 720-962-8700.

Many mortgage professionals and consumers have become complacent about mortgage interest rates given the low levels they reached and maintained in the second half of 2020, even though other indicators said rates should be rising.

Mortgage rates generally follow the 10-year Treasury rates closely and late last year and early in 2021 the benchmark 10-year Treasuries have spiked up off the lows of early 2020.  Mortgage rates are somewhat higher than at the end of 2020 and they have become much more volatile as we begin 2021.  What that means is that they have been moving in a wider range up and down, daily.  Although, at the time of this writing, are only slightly higher than the lows we saw in 2020.

COVID and its impacts on the economy remain the leading forces driving the economy and the bond markets but as a vaccine rolls out and COVID restrictions are relaxed, mortgage rates are likely to rise.  Additionally, following the Senate races in Georgia in early January, we saw one of the sharpest interest rate spikes of the past few years.  Although mortgage rates have fallen back to pre-January 5th levels, the 10-year Treasury rates have continued to rise.

As we move further into 2021 it is likely that mortgage interest rates will begin to rise moderately from the lows of 2020 and follow the 10-year Treasuries higher, barring anything unexpected.  For those looking to purchase or refinance in 2021, the first half of the year may be better as far as capturing today’s low mortgage rates.

One note to be aware of is that for the most part, interest rates that are reported in the press are reporting the prior week’s activity.  Often the headlines and stories are based on information that is old.  Mortgage rates could be substantially different in the current week from what the headlines reflect.

While everyone looks forward to searching for their dream home there are several steps that need to be completed in a somewhat sequential order to make the process efficient and as easy as possible.  Following the steps below will help avoid problems and delays.

CHECK CREDIT

A good credit score is essential to buying a home, as it proves you have a good track record of paying off past debts (such as credit card bills and loans). The higher your credit score, the lower the interest rate you will receive. Usually, a credit score of 720 or higher will get you the lowest interest rate on a conventional mortgage and a score above 760 will obtain the lowest interest rate on a jumbo mortgage. The minimum credit score for an FHA mortgage is 600.

You can request a free copy from all three credit reporting bureaus: TransUnion, Equifax, and Experian. Alternatively, you can complete a mortgage application and have your credit run as part of that process.

GET A DOWN PAYMENT

The very first step for every home buyer should be to figure out their finances.  Unless paying cash, buyers will need to get a mortgage.  There are various types of mortgages (a discussion which is beyond the scope of this article) and each has different down payment requirements that range from zero down payment for a VA loan, up to 20% down for a jumbo mortgage.  Conventional and FHA mortgages allow for down payments as low as 3%.

The source of the down payment can be bank accounts, investment accounts, retirement accounts, the sale of assets and gifts from relatives.  Two sources of funds that cannot be used for the down payment are cash and crypto currency.

MORTGAGE PRE-QUALIFICATION

Before you head out looking at homes to buy, getting pre-qualified is a critical first step.  Contact a qualified loan officer who is knowledgeable and who can help you through the process.  Asking friends and family for a referral is better than cold calling a company.  The pre-qualification process should guide you in determining how much you qualify for and what your budget is from the purchase price standpoint and monthly payment.  You should have most of your questions answered during this process.

Credit, employment history and assets will also be evaluated.  Typically, you will not be able to start looking at house until you know you are pre-qualified.

ATTEND A SEMINAR OR TAKE CLASSES ON BUYING A HOME

While potentially beneficial for anyone, a first-time homebuyer may benefit from taking a home buying class that also talks about budgeting and overall costs of home ownership.  Community organizations and many local government and nonprofit agencies also offer classes that can help you prepare for the financial responsibility of owning a home.

ASSESS NEEDS

Once you have a budget in mind, make a list of your must-have home features. Your price point will likely dictate the size, location, and amenities of your future home.  Among the factors to consider are:

HIRE A REAL ESTATE AGENT

Most buyers find it helpful to have a real estate agent on their side to guide them through the process. It is a good idea to interview real estate agents to find one you can trust to have your best interests in mind. Again, asking friends and family for referrals is often the best way to find a realtor. Typically, sellers fund the buyer’s agent commission, which makes using an agent a cost-effective option for buyers.  Here are some areas where a buyer’s agent can help:

By following these steps, you have a much better chance to make the home buying process efficient, enjoyable, and successful.

 

The primary reason people do not understand reverse mortgages is because there is a lot of misinformation presented by the media, financial advisors, accountants, attorneys and friends and family.  Although often well intentioned, the information presented consists of half-truths (at best) and at worst, totally inaccurate information.  And worst of all, the true benefits are not be presented due to a lack of understanding about what a reverse mortgage is, how a reverse mortgage works and what the benefits of a reverse mortgage are.

The intent of this article is not to explain reverse mortgages or to address many of the half-truths and inaccuracies that float around.  Many of these are addressed on the Spectra Mortgage website on the reverse mortgage page here.  What I want to do is to highlight the fact that for many people a reverse mortgage is superior to a traditional mortgage because it offers more security, financial planning opportunities and financial efficiency than a traditional mortgage.  Reverse mortgages also provide unique financial benefits to people who do not have a mortgage. Lastly, they can be a hedge against real estate values going down during retirement.

FINANCIAL EFFICIENCY

What is meant by financial efficiency is the ability of an individual to manage all assets in a unified manner with the ability to chose which asset can be used to best meet a financial obligation or need.  For example, rather than selling an investment or taking money out of a retirement account to meet a need and thereby lose the earnings from the investment, it may be more efficient to use a reverse mortgage and leave the other funds invested.  This can be accomplished without having to take on a large payment which is required if a traditional mortgage is used for the same purpose. The use of the reverse mortgage also avoids an income tax liability if investments or retirement assets are liquidated.

FINANCIAL PLANNING OPPORTUNITIES

For those with low mortgage balances or those without a mortgage there are significant benefits that reverse mortgages can provide.  A reverse mortgage can help manage sequence of return risk that is a major issue in retirement planning.  Simply stated, sequence of return risk is the risk that an individual will run out of money faster than expected due to market conditions.

A reverse mortgage can also provide access to a line of credit the grows every year, is easily accessible, cannot be frozen and allows, but does not require, payments.

Lastly, a reverse mortgage can be used to be a valuable tool for retirement income planning (which is different that financial planning).

SECURITY

Many ask if reverse mortgages are safe or will state that they believe they are unsafe.  The mortgage that is not safe for someone in retirement, or approaching retirement, is a traditional mortgage.  Here are two examples.

Example 1

Homeowner is 64 and is still working and has a mortgage.  Homeowner gets laid off or loses a job.  Being older it may be harder to replace the lost income and it can certainly take longer to replace.  With a traditional mortgage the bank does not care.  The payments are still due and if not made will ultimately lead to foreclosure.  If the homeowner had a reverse mortgage, they could have made payments if they desired but when they lost their job, they could have stopped making payments with no possibility of losing the house.

Example 2

Homeowners are married and both receive Social Security.  One spouse passes away which means the survivor only receives the higher of the two social security amounts, not both.  This effectively cuts their income by up to half or more.  With a traditional mortgage the bank does not care.  The payments are still due and if not made will ultimately lead to foreclosure.  If the homeowner had a reverse mortgage the fact that their income has declined does not matter since they are not required to make payment anyway.

REAL ESTATE VALUES

With a traditional mortgage if prices were to decline to the point where the loan balance exceeds the value of the property, the homeowner is still required to pay the entire balance of the mortgage.  This is known as being “underwater” and has happened often during recessions and when real estate values decline.

With a reverse mortgage if the homeowner is “underwater” the borrower is not required to pay the full balance if they sell the house or move.  They are only required to pay what the house is worth, and the rest of the mortgage is written off with no impact to the borrower or their beneficiaries.  This is a feature unique to reverse mortgages because they are non-recourse to the homeowner if they are “underwater”.

If the homeowner establishes a reverse mortgage when values are high and then real estate values decline, a homeowner will benefit since the reverse mortgage was based on the higher values.  Therefore, a decline in values is less harmful with a reverse mortgage compared to a traditional mortgage and is a hedge against a collapse in real estate values.

For more information on reverse mortgages and to get a complete picture of them, contact either Wayne Tucker at wtucker@spectramortgage.com or Kim Renquest at krenquest@spectramortgage.com. They can both be contacted at 303-468-1985.