Building inspectors can uncover problems that should be addressed in remodeling and also monitor compliance with building codes during construction.
Consider Mortgage Insurance Options
Private mortgage insurance (PMI) is generally required when the owner of a home has less than 20 percent equity—that is, owes more than 80 percent of the home’s appraised value to a mortgage lender. With PMI, the borrower pays a monthly premium as part of the mortgage payment to insure the lender against any loss that could occur if the borrower were to default on the mortgage.
While PMI is designed primarily to protect lenders, it offers benefits for borrowers, too. The most obvious is that PMI enables borrowers to put down less than 20 percent cash to buy finance a home. It gives buyers a chance to purchase a more valuable home than they could otherwise afford. With PMI, borrowers can finance a house with as little as 5 percent equity and save on income taxes by having a larger mortgage-interest deduction. They can conserve cash for remodeling, decorating and furnishing a home or for other major purchases.
How Private Mortgage Insurance is Financed
There are normally several different options for paying for mortgage insurance:
- Monthly premiums: Borrowers can make one premium payment at the loan closing and additional payments along with their monthly mortgage payment. Premium payments continue until the borrower can satisfy the lender that he or she holds 20 percent or more equity in the home. This can happen sooner than one might think through natural appreciation in the home’s value as markets improve or with completion of a remodeling project that boosts the home’s value. The only proof needed would be a supporting appraisal.
- Annual premiums: One full-year premium payment is made at the mortgage closing, and funds for subsequent annual renewals are collected as part of the monthly mortgage payment.
- Single premium: A one-time payment is made at closing, usually financed with mortgage money, so there are no out-of-pocket costs.
Most plans offer options for refundable or nonrefundable premiums. A refundable premium allows the borrower the opportunity to receive money back on any unused portion, in the event that mortgage insurance coverage is discontinued before the loan is paid in full. The cost for a nonrefundable premium is slightly less than that of a refundable premium
The caveat to borrowers subject to PMI is that they’d need to initiate a review and appraisal to be released from the PMI requirement; lenders are not required to inform borrowers when 20 percent equity has been attained.
Mortgage Life Insurance
Mortgage life insurance pays off the balance of the insured’s home mortgage in the event of his or her death. In traditional mortgage life insurance policies, the amount of insurance coverage decreases over time as the mortgage balance is paid down; the benefit is equal only to the mortgage balance at the time of the insured’s death.
Because mortgage life insurance rates are higher than rates for conventional term life insurance, most experts agree that if you want to make sure there’s enough money to pay off your mortgage if you die before your house is paid off, it’s better to buy a term life insurance policy with a benefit equal to the amount of the original loan. Not only is conventional term life insurance less expensive than mortgage life insurance, the beneficiaries receive the full amount of the original mortgage. This should enable them to pay off the mortgage and have money left over.
The best deal of all may be in purchasing term life insurance with a refundable premium. Although premiums are slightly higher than for basic term life, if you hold a refundable-premium term life policy for the full term (normally 5, 10, 20 or 30 years), the insurance company pays back the total of all the premiums paid. The money recovered by the policy holder is tax free.
