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How to Invest in Real Estate: A Crash Course

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The American dream has always included owning a home, but when so many folks have the bulk of their lifetime earnings tied up in their homes, many problems can arise. Plus, investing in real estate can be a very dangerous proposition. In this crash course, we highlight some great tips on how to get the most out of your current living arrangement, as well as some real estate investment ideas to consider (and ones to avoid).

Buying A Home: A Guide

If you are deciding to buy a new home, welcome to one of the most complex decisions you’ll ever work through in your life. As you know, buying a home entails considerably more than merely determining how big your mortgage payment can be. There are several major factors that you must examine before you cough up your down payment and schedule a closing date.

The Advantages of Buying a Home

Before getting into the details of how to buy a new home, first let’s discuss the advantages of owning a home.

The pros of owning a house extend beyond building equity and constantly investing in something that will (hopefully) give you a return that will at least be equal to financial market returns. In addition to those benefits, you can also qualify for mortgage deductions on interest, property taxes and some closing costs from your federal income taxes. These kinds of additional tax benefits make owning a home more enticing, even if the real estate market isn’t appreciating the way it used to.

Be sure to read the Introduction To Property Taxes.

Key Considerations for First-Time Home Buyers

Location
This issue brings with it a host of questions to consider. Is the house that you want to buy located in a convenient place? Is it near a major highway? What about shopping and groceries? If you have kids, are there decent schools in the area? What is the crime rate there? Will you have a long commute to work? What have property values done there over time?

Cost
The real cost of a house goes far beyond your mortgage-although you must start with that when deciding how much house you can afford. The rule that most financial planners tell their clients is that their mortgage (including insurance and taxes) should not be more than a quarter of their gross monthly income or a third of their monthly disposable income. There is also the matter of a down payment, which will need to be at least 20% of the value of the house in order to avoid private mortgage insurance.

You also need to think of the myriad items that you’re going to have to buy as soon as you move into a home as well as any major repairs or maintenance that must be done in order for the house to pass inspection or for you to be able to live there comfortably. You must also factor in the cost of ongoing maintenance and repairs, which may be substantial at times.

Dealing with Realtors
Unless you are effecting the purchase transaction for your home all by yourself, then you will need a real estate agent to help you find a home and close the deal to buy it. But by no means should you simply accept everything your realtor tells you as true without question; they make a living by moving as many people as possible into and out of houses as fast as they can. In a hot market, realtors will often try to get inexperienced buyers to make an offer on a house equal to the current asking price when in fact they should probably make an initial offer that is much lower. Smart buyers will get a list of comparable houses around the one that they are buying and have some idea of what kind of market they are buying into.

Check Your Credit Score
Your credit score will determine the rate of interest that you have to pay on your home loan, so now is the time to get your credit score in order. Get a copy of your credit report from each of the three credit bureaus and go over them all with a fine-tooth comb to make sure that you don’t have any negative items on there that should have been removed or that are patently false. If you have small balances outstanding on any of your debts, try to get them paid off before you apply for a home loan. Those little debts can bring your score down and prevent you from getting the best rate possible on your mortgage. Below is a table from Credit.org, highlighting what different score ranges mean:

Credit ScoreScore Range
Poor Credit300-550
Subprime550-620
Acceptable Credit620-680
Good Credit680-740
Excellent Credit740-850

Shop Around and Negotiate
Just because you found one dream house that seems perfect doesn’t mean that there isn’t another one out there that’s even better. If a house has been on the market for a long time, you need to find out why if the reason isn’t apparent. The best time to shop for a house is when you aren’t in a hurry to find a place to live and can afford to draw out the negotiations with the current owner.

Do Your Homework
Before you buy a home, take the time to familiarize yourself with all of the elements of a purchase transaction. Read a book or two that explain the mathematics of mortgages, the tax rules for homeowners and the risks that come with owning real estate. Find out how much insurance you will really need to carry on your home, which may be more than what is legally required.

Guide for Buying Rental Property

Wouldn’t it be great if you could buy a house and not have to pay any of the mortgage, and even get paid to own that house? Well, depending on how you go about it, you can do this by becoming a landlord. Of course, there’s no free lunch, and there are risks and work that have to be taken into account when you want to rent out a piece of property.

Initial Considerations for Buying a Rental Property

Before you start thinking that becoming a landlord is a ticket to easy money, you need to think about the responsibilities and risks involved, and weigh out the costs versus the benefits. First thing to think about is your own finances, and whether putting your money into real estate is worth it for your overall financial plan.

If you decide that real estate is a viable investment, you then need to consider what kind of time and money commitment you’re willing to make. If something goes wrong with your rental property, you will be responsible for fixing it (unless you hire a property manager) and/or paying for it. As well, you’ll be responsible for making sure your tenants pay on time and don’t wreck the place. These things take time and money, so make sure you have both of these things to have a successful rental property. The benefits of renting out a house are that you can get someone else to pay the mortgage, and hopefully make even more to have some monthly income. No matter whether you want to move into the house later on, or want to sell it down the road, having someone else pay the mortgage for a few years (or longer) is a definite benefit.

Be sure to look through these 50 Free Resources to Help Manage Your Money.

Other Considerations

Some of the other considerations you need to factor in before buying a rental property are:

  • Rent – Look at ads for other rentals in your area to see what the going rate is for the size and location of your rental. This will also help you determine whether this is a good investment. Also, check out forecasts for interest rates to see how much your mortgage will cost in the longer term.
  • Whether utilities will be included in the rental price – Find out the average cost for this, and again look at ads for other rentals to see if this is the normal way of renting in your area.
  • The lease term – Month-to-month definitely adds flexibility, but a year-long term will give you some security.
  • How much the damage deposit will be – This is usually the equivalent of one month’s rent, but there are laws that dictate what is allowed to be charged.

Renting Out a Room in Your House

An alternative to buying and renting out an entire building is to simply rent out a room in your own house. Whether you are looking for someone to help in paying for part of your expenses or are looking to build a new monthly income, you need to follow some common sense advice before taking the next step.

Going month-to-month on payments can make it easier to break an agreement, but you may want to check with a local attorney before you draft your own version of a lease. Make sure everything in the agreement is covered. Utilities should not be an issue as most people tend to have their own cell phone, but nowadays you can get an affordable phone/internet/cable TV package. Splitting utilities may not be worth the effort. Factor that all in the flat rate. Be sure to lay the ground rules about guests and other potential nuisances and make sure you lay out your eviction reasons clearly.

Making Your Property Rental-Ready

Depending on where you live there will be different guidelines and laws for what your rental property needs to have. If it’s your first rental, you will want to consult with an attorney and a tax professional to cover yourself as to the legal and tax liabilities. As well, the IRS requires that you report all rental income on your tax returns, so you’ll want to see how this affects your tax rate and what tax write-offs are available.

No matter how well you screen your tenants, renters are going to be harder on your building than you would be. There will be a lot of wear and tear, so keep this in mind when preparing the property – you want to make sure it has the basics, but expensive add-ons are not necessary. Replacing floors and mouldings can be expensive undertakings, so go for function and durability over looks.

Getting Tenants

There are many free options available for advertising. Craigslist and Kijiji are great places to start, and you can also put up flyers around town or take out an ad in local newspapers and publications. It doesn’t matter how you get your tenants, what matters is how you choose which tenants you want to take. Credit and background checks are a good starting point—though they will cost you money, it’s money well spent—and asking for references from past landlords will give you a good idea of who you are getting.

Choosing tenants is the most important decision you’ll make during the rental process, as it will determine whether you can count on the monthly rent check, and how your investment property will be treated. Be thorough and take your time during this process.

Be sure to about all of the tax implications and nuances involving rental properties.

Financing Your Real Estate Investment

Financing Your Real Estate Investment: A Guide to Mortgage Types

If you’re looking into getting a mortgage, there are a lot of different types to choose from, and depending on the interest-rate environment you’re borrowing in, some will make more sense than others. We highlight all of the different mortgages that are available to homeowners and prospective homeowners in the U.S., and go over the basics of how each mortgage works, and what downside you should worry about.

Fixed-Rate Mortgage

This is the most basic of mortgages and it involves an amount of money lent out by a lending institution at a fixed-interest rate for a fixed term. The borrower of these funds will have to pay back the mortgage in equal monthly (or bi-weekly) installments until all interest and the principal loan are paid off. The terms available for a fixed-rate mortgage change depending on the particulars of your mortgage and the institution you’re borrowing from, but are usually in five-year increments, such as 15-, 20-, 25- and 30-year mortgages. The longer the term is for the mortgage, the more interest you will be paying over the mortgage’s term. So, even though with a 30-year mortgage you will have cheaper monthly payments than a 20-year mortgage, you will be paying more in the long run.

The downside to a fixed-rate mortgage is that the longer term you lock-in for, the higher your interest rate will be (that, and the fact that you will be paying a substantial amount of interest over the term of your mortgage). The interest rate is higher to protect the lending institution from risk if interest rates should skyrocket.

Adjustable Rate Mortgages (ARM)

This type of mortgage is also known as a floating-rate mortgage or ARM, and the interest you pay will be tied to a certain benchmark. The benchmark that is chosen usually reflects the cost of lending that the lender is experiencing, plus the margin or mark-up that will be added to the percentage.

When entering into an ARM, there is usually a low fixed-interest rate (lower than the interest rate for a fixed-interest mortgage) for a short part of the loan, maybe five years, and after that the interest rate will be adjusted monthly based on the benchmark or index that the lending institution uses. So, for a borrower, there is both upside and downside to this, as the interest rates can fall or rise depending on the interest rate environment. The downside is always that unpredictable nature of these loans, and that it’s hard to plan years into the future, as your monthly payment will fluctuate.

A bit of good news is that ARMs typically come with caps that limit the amount your payment can rise from one month to the next and over the course of your entire loan. The bad news is that these caps can lead to negative amortization, where the interest rate rises so much that your monthly payment does not even cover the cost of your interest payment, so your loan is actually increasing in value.

Be sure to read the Federal Reserve Board’s Consumer Handbook on Adjustable-Rate Mortgages.

FHA Loans

The FHA is the Federal Housing Administration, and an FHA insured loan is a mortgage loan that is given out to lower-income individuals to help them afford to buy a home. An FHA insured loan is given out with a lower down payment, and is given out by FHA-insured lenders. This limits the places that you can get a loan from, and also limits the amount that you are able to obtain as a loan. The FHA helps people in need obtain loans that they would normally not be approved for, because the FHA insures the loan to the lender. The loan can also incorporate all of the closing and legal costs of buying a house, and your down payment can be 3.5% of the purchase price. This is a loan-type that is available when you can’t afford the terms of a standard loan, and whether you’re approved is still based on your credit history.

VA Loans

A VA mortgage loan is a loan that is offered to U.S. veterans or their spouses, and makes it possible for veterans to obtain mortgages with zero down payment. However, only certain lenders are able to make these loans (those insured by the U.S. Department of Veteran Affairs), and the loans are only given to purchase houses in remote areas. If living remotely is for you and you are a veteran, this mortgage is a great deal, as you get good interest rates on the loan, and the limit for a loan is over $600,000 with no down payment.

Interest Only Mortgages

An interest-only mortgage is exactly what it sounds like: you are given a mortgage and are required to make monthly payments for the interest on the mortgage for a certain amount of time. At the end of the term, you don’t own any part of the house, but you are usually then able to enter into a standard ARM or fixed-interest loan. It’s a chance to help you build up your down payment in order to start paying off the principal.

The downside of an interest-only mortgage is that you don’t pay off any of the principal, so you really don’t own any of the house, and because interest-only loans are more expensive for a lender, the interest rate will be higher than what you would pay on a regular mortgage. This might not be perfect for everyone, but it could be a good way to get into the housing market with low monthly costs if you’re sure you’ll be making more money in the future. For instance, if you are just starting your career, or are finishing an advanced degree, and think that five or 10 years down the line you’ll be able to handle more expensive monthly mortgage payments.

Reverse Mortgages

Reverse mortgages resemble home equity lines of credit in that they are borrowed against the equity in the home. But this type of loan does not have to be repaid in the same manner as other mortgages or lines of credit; a reverse mortgage is used to access home equity in the form of either a lump-sum payment or monthly cash payments to the homeowner. The most common type of reverse mortgage is a Home Equity Conversion Mortgage (HECM), which is insured by the U.S. government. Private lenders also offer this type of loan, but they are not federally insured and are usually much more expensive than HECMs, which charge a rate of interest that is tied to the one-year T-Bill rate.

Reverse mortgages are designed for a very specific segment of homeowners. They are only available for those who are at least 62 years old, live in the home against which they are taking the mortgage and are at least close to having their mortgages paid off. In most cases, the loan proceeds must be used to pay off any remaining balance from the current mortgage or other lien on the home, and there is an absolute cap of $625,500 on the loan balance.

Reverse mortgages are attractive to seniors for several reasons. Chief among them is that they provide immediate tax-free cash that homeowners can use for living expenses, to pay off debt or to make major purchases. Furthermore, no payment is required from the homeowner as long as they continue living in the house. Although reverse mortgages can be a viable solution to the financial dilemmas of some homeowners, they also have several major drawbacks. These loans are generally the most expensive type of mortgage available, and their closing fees can be quite high.

Balloon Mortgages

A balloon mortgage is like a fixed-term or adjustable-rate mortgage, except that your principal never fully amortizes, so at the end of the term you still have a loan that you have to pay off. If the loan can’t be fully paid off at the end of the term, there is sometimes the option for the borrower to then refinance the remaining amount, or they will have to sell the property and pay off the loan. These types of mortgages are mostly used for commercial properties.

A Guide To Mortgage Refinancing

Home loans constitute one of the largest types of debt carried by consumers today. The ability to own a home free and clear without a mortgage is impossible for most people, so getting the lowest rate possible on a home loan is of vital importance to most homeowners. The continued volatility and uncertainty in the stock and bond markets has also made it harder than ever to get ahead, so when interest rates drop, many people have been able to improve both their cash flows and their balance sheets by refinancing.

What Is Refinancing?

Homeowners receive initial financing on their homes when they get approved for the loan that they use to purchase their homes. Refinancing is, conceptually speaking, simply acquiring a new loan to replace the old one. A homeowner can refinance by taking out a new loan that typically has better terms than the old one and use it to pay off the first loan.

Overall, refinancing can save homeowners thousands of dollars over the life of their loans. Homeowners who wish to reduce the terms of their loans, such as from 30 to 15 years, must also refinance.

Considerations for Refinancing

Although refinancing is quite often well worth the cost and effort that is required, it is not always a wise course of action. It usually takes anywhere from 2-5 years to recoup the cost of refinancing. If the home’s value is appraised at less than what is expected, then refinancing can become more difficult and expensive. There are also fees for recording, flood certification, title insurance, tax services and pulling a credit report. There may also be origination or discount points built into the loan that compensate the loan officer.

Another common mistake is to refinance using an adjustable-rate mortgage (ARM), which charges a very low “teaser” rate at the beginning and then adjusts to a higher rate that matches a benchmark rate index such as the LIBOR. ARMs can be a good idea when interest rates are high, because if rates drop, then so will the monthly payment. They can be a fatal mistake for borrowers when rates are at historic lows, because they can only go up from there.

Just as they did when they first bought their homes, homeowners must have good credit in order to qualify for a decent rate of interest when they refinance. They should take the time to address any blemishes they find on their credit report before they apply and should check their debt-to-income ratios to see how they will look to the lender. If they have no money saved up, then they might be wise to accumulate some savings first and perhaps pay off any small debts that they have, such as the remainder of a car loan or their credit cards.

Be sure to read the Federal Reserve Board’s Consumer Guide to Mortgage Refinancings.

Mortgage Recasting

Some newer types of home loans, such as negative amortization ARMs allow for an alternate process known as recasting. This is a much simpler and cheaper process than refinancing, but it also requires homeowners to apply a substantial sum of money to the principal balance of their loans up front. Homeowners who wish to reduce their monthly payments can make a large lump-sum payment on their loans, and the lender will then recalculate a new payment based upon the same interest rate and term as before-but using the new lower principal balance. Recasting is available for both fixed and variable rate loans, although this process is seldom used for the latter type of loan, and not all lenders or loan investors will allow it. Some lenders will instead offer a loan modification that recalculates a new amortization using the same term but a lower rate of interest.

Avoid These Mortgage Mistakes

Avoid These Common Mortgage Mistakes

Although there is nothing that quite matches the feeling that comes with owning your own home, you need to do your homework before you finalize the terms for the loan that you will take out on it. Having the right kind of mortgage will make owning your home a great deal easier and will also save you many thousands of dollars. The following is a list of the common errors that people make when they apply for a home loan.

Be sure to also read about the 5 Mistakes To Avoid When Buying Dividend Stocks.

Getting an Adjustable-Rate Mortgage (ARM)

This type of home loan boasts much lower payments at the beginning of the loan. Then, after a couple of years, the interest rate will adjust to wherever current rates are at. This type of loan is a good idea when rates are high and starting to drop. They are usually a very bad option when rates are very low and will inevitably rise at some point. Many homeowners who have ARMs have discovered the hard way that once the “teaser” period of low payments comes to an end, the new payment is either much higher than they thought it would be or is more than they can afford.

Unnecessarily Paying Private Mortgage Insurance (PMI)

Any home loan that is worth more than 80% of the value of the home is required by law to have Private Mortgage Insurance, which will pay some or all of the loan balance if the homeowner becomes unable to make the payments on the loan. Of course, a great many homeowners today are not able to come up with a 20% down payment on their homes when they buy them, but it is possible to avoid this by getting a primary loan for 80% of the value of the home, make a 5% down payment and then take out a second mortgage or line of credit to cover the difference.

PMI should be avoided whenever possible because it is expensive and does nothing to reduce your mortgage balance when it is paid. It also requires the homeowners to estimate when they think that their loan value has fallen to 80% or less. Then, to get it removed, they must pay for another appraisal to prove that their mortgage is below the threshold to the lender.

Not Shopping Around for Rates

Although this may seem like the most obvious thing that can be done when you get a home loan, many prospective homeowners do not look carefully at all the options that they have available before they apply with a lender. Members of the military should probably look to the VA for their home loan before anyone else, because VA loans are usually cheaper than anything offered by commercial lenders. Credit unions can also often offer their members better terms than a bank or other lender (but not always). You should probably talk to at least three different lenders to see what kind of deal you can get before you sign on the dotted line.

Letting Your Credit Score Slide

Credit Score Ranges

This is one of the worst mistakes you can make when you apply for a loan. The first thing that you should do before you start shopping for a mortgage is check your credit. Log on to www.quizzle.com and get a copy of one of your reports along with a score and then get copies of your reports from the other two credit bureaus at www.annualcreditreport.com and see what’s on there. Make sure that there are no erroneous items listed and that all negative items that are due to be removed have been deleted. Pay off small loan balances and make sure that you aren’t over your limit on any of your credit cards. If you don’t have any credit history, then you will probably need to build some up by staying current on your utility payments and getting a secured credit card.

Getting a Longer Loan When You Can Afford a Shorter One

This is one of the costliest mistakes that you can make when you get a home loan. When interest rates are really low, it is smart to get a 10- or 20-year note instead of the standard 30 year loan if at all possible (and now there are even 40-year loans!). This will save you thousands of dollars in interest over time and can also provide you with a vital element of security in your retirement planning. You will not need to have nearly as much saved up for your retirement if you don’t have to make a mortgage payment after you stop working.

Letting Your Loan Rate Expire

When you apply for a home loan, the rate that they give you is typically only good for a short period of time, such as 15 or 30 days. Make sure that your loan closing happens before the term expires so that you are guaranteed the rate that the lender quoted you. Of course, this is primarily the lender’s responsibility, but you still need to be aware of this issue.

Lookout for Home Loan Scams

Home loan scams are also known as home modification scams, and they occur when a company or person claims they can get the terms of your mortgage changed to make it easier for you to afford, when they will actually be pocketing your money and leaving you in an even worse place than when you started. In some cases, the fraudster will even ask the homeowners to sign over the deed to their home, with the promise that the deed must be in the scammer’s name to be able to negotiate the terms of the mortgage. Some home loan scammers will also claim that they can lower your mortgage, but you must send your new lower mortgage payments through them to make it happen.

There are a number of things to watch out for, and will keep you from getting duped no matter how desperate your situation becomes. We’ll go over The U.S. Department of Housing and Urban Development’s signs of a loan scam:

Up-Front Payment
The most important thing to watch out for is when someone asks to be paid a fee before they’ve done anything to help you. If a person or company is asking for a fee in order to contact your lender to negotiate the terms, they will be getting paid no matter what happens, and they will often not even try to help. If they do call your lender and ask to rework the terms of your mortgage, and the lender may just say no, then the scammer has gotten their fee for a five-minute phone call. You’ll now be down the fee you paid, and be in an even worse position.

Guarantees
No one can guarantee that your mortgage will be able to be altered, so beware of any person or company who offers you a sure-fire way of lowering your mortgage or renegotiating the terms of your loan to make it more affordable.

Paying Mortgage Payments to the “Helper”
As mentioned above, one of the ways home loan help scammers pay themselves is by claiming they’ve renegotiated your mortgage terms and the monthly payments are now lower, but now all monthly payments must go through them instead. They will most likely pocket your mortgage payments and then take off once you become wise to the scam, leaving you in a much worse situation.

Signing Over Your Deed
This was also mentioned above, and the scam involves the person or company asking that you sign over your deed to them, or to sign papers you don’t fully understand, with the promise that you will be able to keep your home and pay less. When the situation is dire, some will even consider signing over the home that they’re trying to save – in one word: don’t.

Request for Personal Information
If a company or person claims they can help, but first you have to send over personal information like Social Security numbers, credit card numbers, bank account numbers, etc. be very weary, and make sure you know who you’re dealing with. Banks and accredited lending and debt institutions will need this kind of personal financial information, but if it’s a loan-help company, you’re likely to become a victim of identity theft.

Home Equity Loan Guide

There are many ways that consumers can tap into the equity in their homes, but a home equity loan is often the simplest and most convenient. While home equity loans can offer a convenient source of funding for homeowners who qualify, they should not be viewed as a casual source of cash for frivolous or short-term expenses. But they can also be a very effective budgeting tool in some cases as long as they are used correctly.

What Is a Home Equity Loan? How Do They Work?

A home equity loan is a type of second mortgage that a homeowner can take out against the equity that they have accumulated in their primary residence. The lender may be the same lender that provided the primary mortgage on the property, but often a different lender is used.

Home equity loans are offered either as standard fixed-rate second mortgages or as a line of credit. These types of loans are similar in many respects; both usually have terms ranging from about five to 15 years and have a limit of $100,000. Borrowers must have equity that is equal to at least 20% of the value of their homes in order to be eligible for either type of loan. HELOCSs are usually variable-rate loans and come with either a debit or credit card or a book of checks that borrowers can use to access the loan proceeds, and the amount of the monthly payment will correspond to the amount that is being borrowed. Borrowers must qualify to take out either type of home equity loan just as they did with their first mortgage, and they must typically complete a similar application process for their loans as they did for their primary mortgage.

Advantages of Home Equity Loans

Although the application process for home equity loans closely resembles that of primary mortgages, the closing costs for equity loans are usually less than for first mortgages. Home equity loans also resemble their primary cousins in that the interest that is charged on them can be tax deductible. A borrower who is able to itemize deductions can report the interest from a home equity loan in the same section of the Schedule A of the 1040 as for a primary mortgage. And while the interest rate on most home equity loans is higher than for a first mortgage, it is usually lower than it is for unsecured debt because it is collateralized. Car loans, credit card balances and other types of revolving and installment loans were therefore eaten up by home equity lenders who offered lower rates of interest that were also tax-deductible.

Impact on Your Finances

In addition to saving money by paying a lower deductible rate of interest, using home equity loans as a way to consolidate debt can also help the borrower to clean up his or her credit report, especially if he or she is behind on the payments for the debt that is being consolidated. A homeowner who is behind on a car loan by several payments may be able to avert repossession by paying the car off with a home equity loan. But if the borrower is not using the loan to replace current debt, then it will also increase his or her debt-to-income ratio and make it harder to get credit in the future.

Home equity loans can also be used as a source of cash for emergencies such as sudden medical or legal bills if no other alternatives are available. Property values are another critical factor to consider; a homeowner who takes out a home equity loan in a real estate bear market may end up owing more on the property than its current appraised value. As with any other loan, homeowners need to be certain that they will have adequate cash flow to make the payments on a home equity loan with no problem.

Drawbacks of Home Equity Loans

Although home equity loans can improve both your cash flow and your tax refund, they also come with some very real risks. Unlike a credit card or other source of unsecured credit, homeowners are pledging their homes as collateral for this loan, and failure to repay the loan can result in summary eviction and foreclosure. The variable interest rate that comes with most HELOCs should also be carefully considered, especially when rates are low. If this is the case, then it may make more sense to take out a fixed loan to lock in a competitive rate for the life of the loan and avoid the risk of having to pay an increasingly higher rate if rates rise.

A Guide To Title And Mortgage Insurance

When you are buying a home, you will hear about mortgage and title insurances. Both of these insurances are in place to protect the bank when loaning you money for your home. With that said, these insurance types are only necessary in certain instances. We’ll look at what these types of insurance are, when you need them, and how they’ll impact you as a homeowner.

Private Mortgage Insurance

Private mortgage insurance (PMI) is an insurance policy that covers the bank or lending institution in the event that you default on your mortgage. Mortgage insurance is required if your down payment is less than 20% of the overall cost of the home you’re purchasing. Banks and lending institutions may pay this on their own (lender-paid PMI), but more often than not the cost is paid by the borrower (borrower-paid PMI), and will become a monthly cost, thus raising the amount of money you’ll need to pay for your home. PMI can be canceled once your loan is reduced to a certain amount, but the details differ depending on your insurance terms.

The amount of your PMI premium will depend on how much you’ve put down, the type or mortgage loan you’ve received (fixed for variable) and your credit score. The premiums will usually be in the range of .5% to 6% of the principal loan you received, according to the Texas Department of Insurance, but they can vary depending on your insurance provider and where you live.

PMI works in the following way: The bank or lending institution loans you an amount of money, and to protect themselves from the risk that you will default on your loan, they make the borrower take out a PMI policy. The insurance policy for the bank or lending institution will cover a certain amount of the loan, thus protecting them in the case that the home is repossessed and sold at a loss. In the event that you default on your loan, your home is repossessed and sold, and if it is sold for some amount below what your loan was, the insurance company will cover that amount up to a specified figure that is agreed upon in the insurance policy.

If you want to be a homeowner, but don’t have the savings to pay the 20% of the cost of the home you wish to buy, PMI is almost inescapable in the U.S. Consider whether it’s worth it to pay this extra amount per month to own a home, or whether it’s best to continue saving in order to escape this extra monthly financial burden. FHA and VA loans usually offer their own mortgage insurance, so if you are thinking about obtaining a mortgage from one of these associations, the terms for mortgage insurance may differ.

Title Insurance

Basically, title insurance is in place to protect the bank that approves your mortgage against any title claims. Title claims or defects, according to First Foundation Insurance, include the following: “judgment liens, liens for repairs or improvements to the property, tax liens, bankruptcy proceedings, probate proceedings or deeds that did not fully transfer the property.” It’s basically anything that can make your legal ownership of the property problematic. If one of these problems exists with the title, but it is not known when you buy the house, title insurance will protect either you or the lending institution against property or monetary loss caused by these title defects.

Since the policy typically covers just the bank, it makes lots of sense for a homebuyer to spend a few extra hundred bucks or so to get the added protection. The key is to pay attention to any exceptions that could leave you a bit short on the coverage you really want to have in place. The biggest reason for title insurance protection is for what may be unseen at the time of the closing, such as liens on the property or possibly even heirs that could claim they have a legal right to the property. Beyond that, there are numerous issues that could come back to bite a homeowner, including building permit violations from previous owners, possible encroachments and forgeries after title insurance is issued, and more.

Be sure to ask your realtor and attorney about to best protect yourself and look for recommendations to title insurance companies. Don’t be afraid to shop around and find yourself the best deal and best protection.

Real Estate Investing

Investor Resources for Real Estate Investing

For those interested in simply gaining exposure to the real estate market via equity markets, we encourage you to sift through the following resources, which highlight REITs, real estate development stocks, and construction companies:

The Bottom Line

Owning a home or a rental property is a major responsibility. Once you sign on the dotted line and walk away from the closing table, your life will change in many respects. If you take the time to prepare yourself emotionally and financially, then you will be able to find a home that is enjoyable to live in and that you can be proud of.