Homebuying 101

Insurance & Taxes

Becoming a homeowner means thinking about homeowners’ insurance and property taxes. We break down everything you’ll need to consider.

Questions & Answers

What is homeowners insurance?

Homeowners insurance is a form of property insurance that provides financial protection against disasters to your home. Normally, homeowners insurance is sold as a package policy, meaning not only does it provide coverage for damage done to your property, it covers any damage you may cause to the homes/neighbors around you. Note that anything maintenance-related is always going to be your responsibility and won't be covered under your policy.

What does homeowners insurance cover?

Standard homeowners insurance covers the structure of your house, personal belongings, additional living expenses should you not be able to live in the house due to damage, and provides liability protection.

Standard homeowners insurance will cover the cost of repairs to the structure of your home in the case of disasters that are listed in your policy, such as a fire or hurricane. Typically, flood and earthquake insurance are not included.

Coverage of personal belongings includes all of the stuff inside and outside of your home. These belongings are insured against the disasters listed in your policy, as well as robbery. For expensive single items, like a camera or jewelry, you may want to purchase a special personal property endorsement to insure the item for its appraised value.

Liability protection insures you against damage (both bodily injury and property damage) that you or a member of your family may cause to other homes.

Homeowners insurance will also cover additional living expenses (ALE). For example, if you cannot live in your home due to damage from an insured disaster, your insurance may cover your hotel bills, meals, and other costs that come up while your home is being rebuilt. Note that there is often a time limit on your ALE coverage, though this can often be extended for an additional premium.

Do I need homeowners insurance?

You are not legally required to purchase homeowners insurance in order to own a home, though most lenders will require coverage. Additionally, if you live in an area prone to floods, federal regulation requires you to purchase additional insurance policies. Your lender may also require additional coverage if you live in an area where earthquakes are likely.

What is mortgage insurance?

Private Mortgage Insurance, often known as PMI, is an insurance policy that protects lenders from defaults on home mortgages. Typically, if you make a down payment on a home that is less than 20%, you will be required to pay mortgage insurance. While this lowers the lender's risk, therefore making it possible to qualify for a home loan you might not otherwise qualify for, it also increases the cost of your payments.

What does Private Mortgage Insurance (PMI) cover?

Mortgage insurance protects the lender from loss in the case that you can no longer make your mortgage payments.

How do I know if I need mortgage insurance?

Typically, your lender will require that you purchase mortgage insurance if your down payment is less than 20%.

Can I avoid having to pay mortgage insurance?

You can typically avoid paying mortgage insurance by putting more than 20% down when purchasing a home, or by "piggybacking," where you take out a smaller loan for enough money to cover the 20% down payment. A piggyback loan is when a borrower takes out two loans at the same time: one for 80% of the home’s value, and another loan in the value needed to equal 20% when paired with the down payment cash. Using the piggyback loan method can also significantly lower the interest rate of your mortgage. It will create a second lien on your home.

Note that you close on a piggyback loan at the same time as your mortgage, and it may be subject to closing costs, meaning you’ll need to bring more cash to the table. But, you may be able to deduct the interest on your piggyback loan on your tax return. You’ll also pay for your mortgage and piggyback loans separately, so you’ll want to be sure you’re sending payment to two different spots.

What is earthquake insurance?

Earthquake insurance is coverage for the damage done to your home and personal belongings inside your home in the case of an earthquake. Earthquake insurance also covers additional living expenses (ALE), which are the costs incurred when you must live somewhere else due to damage to your home, or while repairs are being made. Earthquake insurance is not normally included in standard homeowners insurance, and must be purchased separately. Because the incidence or earthquakes varies greatly throughout the United States, rates and need will vary greatly.

What does earthquake insurance cover?

Earthquake insurance covers costs that you sustain in the event of an earthquake, specifically the costs for damage done to your home, personal property, as well as additional living expenses. Additional living expenses, or ALE, include the cost living somewhere else while your home is being repaired (or is too damaged to live in), as well as the costs of restaurants, temporary phones lines, and so on. Moving, storage, and laundry may also be covered.

How do I know if I need earthquake insurance?

When considering purchasing earthquake insurance, there are several factors to consider, such as: cost of insurance, area in which you live, and the risk of your house.

The cost of earthquake insurance goes up as your risk increases, which means that it could be quite expensive in some areas. You may need to consider whether or not you can afford this policy; if not, there are many ways you can protect your home and reduce the damage done to your home in case of an earthquake.

One of the most important factors in determining if you need earthquake insurance is determining if you live in an area where earthquakes are common. You can search for fault lines and risk zones using the U.S. Geological Survey website.

You also need to determine if you have a high-risk house. This means assessing the material out of which your house is made, what type of soil your house sits on, has multiple stories, and so on.

How do I know if I am in an earthquake zone?

You can determine if you are in an earthquake zone by consulting the U.S. Geological Survey website, which will outline earthquake risk based on location.

What are property taxes?

Property taxes are taxes on real estate. It is a tax that is assesed by the local government, and based on the value of the property. Typically, this tax revenue is used for repairing roads, building and repairing schools, snow removal, and other things of that nature. The tax rate and exactly what is considered taxable varies by state and municipality.

What are typical property taxes for my area?

Property taxes vary greatly from state to state and across municipalities, so you should research the tax laws of your new neighborhood when moving to determine typical property taxes in your area. You can do that at www.census.gov/govs/qtax/

Property tax rates are decided by local councils, boards and legislatures, who determine the appropriate amount of tax revenue that needed to maintain the municipality. A tax assessor will also come to your home and determine its value. Generally, property taxes are calculated by multiplying the property tax rate by the current assessed value of the home, thus the property tax can and will be different for everyone based on location and your specific home.

What goes into property taxes?

When determining your property taxes, three factors are considered; the assessed value of your property, any exemptions you qualify for, and the property tax rate in your area. The assessed value of your property is determined by a tax assessor. Typically this is done annually. If you qualify for various exemptions, this may help to lower the assessed value of your property, and thus lower your overall property taxes. Types of exemptions include: being a veteran, senior citizen, or disabled, or living on agricultural property. The tax rate in your area is determined by multiplying the rate set by your municipality and the assessed value of your property.

What is a Homeowners Association Fee (HOA)?

A Homeowners Association Fee, or HOA, is a fee paid monthy to an organization for the maintenance and improvement of your property, such as your yard, and communal property, like a swimming pool. While those living in condominiums almost always have to pay an HOA fee, this can also apply to single family neighborhoods. For condominiums, this fee covers maintenance of lobbies, elevators, swimming pools, and other amenities. In the case of single family homes, this especially applies when there are common amenities like tennis courts or swimming pools.

How do I know if my new home requires me to pay HOAs?

Your real estate agent can tell you if your home is a part of a Homeowner's Association. If you're not working with a real estate agent, search for your property on http://www.hoa-usa.com/. or ask a friendly neighbor.

How much are HOA fees?

HOA fees vary greatly depending on amenities and the value of your property. Before buying a home, you should always calculate the cost of HOA fees since its a charge you will be expected to pay for as long as you live in the home.

Is there a benefit to owning a property that has an HOA?

The benefits to owning a property that has an HOA are: community appearance, low maintenance, various amenities, and association management.

Because homes that belong to an HOA must adhere to certain guidelines about the appearance of their homes, you can rest assured that your home and that of your neighbors will maintain a certain level of attractiveness.

Certain HOAs may take care of various services for you, such as trash removal or lawn care, thus reducing the labor of maintaining your home.

Paying the HOA also means that you get to use the amenities that this fee goes toward maintaining; that might be a pool, condo lobby, gym, or patio.

Association management means that if you have an issue with your neighbors, you can go to management, instead of having to confront your loud neighbor by yourself.

What are transfer taxes?

Transfer taxes are transaction fees imposed on the transfer of land from one owner to another. This tax is paid by the seller of the property. Gift and estate taxes are types of transfer taxes.

What is flood insurance?

Flood insurance is an insurance policy that covers physical damage done to your property and possessions in case of flood. It covers building property, such as the building and its foundation, as well as personal belongings and things you own within your home. Flood insurance does not, however, cover the expenses of additional housing, cars, or property outside of the insured building. Coverage is typically limited for basements, crawlspaces, or any living space where the floor is below ground level.

How do I know if I need flood insurance?

If you live in a high-risk flood area and have a mortgage from a federally regulated or insured lender, you are legally required to have flood insurance. If you live in a moderate-to-low risk area, you are not typically required to have flood insurance. To determine if your property is in a flood zone, you can visit the FEMA website and access the FEMA Flood Map Service Center. There, you can type in your in address and assess your flood risk.

How do I find out if my property is in a flood zone?

To determine whether or not your property is in a flood zone, you can visit the FEMA website and access the FEMA Flood Map Service Center. There, you can type in your in address and assess your flood risk.

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