How P+I+T+I = Common Core Math
OR Why did my house payment go UP?!? (Part 2)
Let’s review where we left off in Part 1 of this series. If you have a fixed interest rate mortgage loan, the principal and interest of your house payment cannot change. BUT your house payment can change. YES, it’s as clear as Common Core Math.
Most mortgage lenders escrow your property taxes and insurance –meaning they collect the appropriate amount with your loan payment, and then stash it away in an “escrow account”. That’s a fancy word for savings account-but it does not belong to you or the lender. It is just a pass through account to hold money and it does not pay any interest. When the semi-annual bill for property taxes or home owners insurance are due, your LENDER pays these bills for you out of the money set aside in the escrow account. Pretty slick. This eliminates your responsibility of paying on time and avoids the potentially sticky issue of not having the dollars when you need them. Too much month at the end of the money and notes from your mom do not excuse these liabilities. This also acts as a sort of “protection” for the mortgage lender to insure that:
1) Your home is NOT going to end up on the dead beat tax roll and the Sheriff’s TO-DO list. I can assure you, if the Sheriff ends up at your door-he’s not selling tickets to the Fireman’s ball. Awkward.
2) The property and casualty insurance coverage remains in effect and full force in the event that North Korea misses whatever their target might be and hits your house. Yes, even an unexpected explosion that eliminates your house does not eliminate your mortgage. Remember, you made a LONG TERM till-pay-off-do-us-part commitment.
Now, back to that little note from your loving lender informing you to send more money. The two variables in the P+I+T+I equation are the “T” (taxes) and the “I”(insurance). For the sake of simplicity and sanity, let’s dive into your homeowner’s insurance first.
There are many factors that not only affect what your initial homeowner’s insurance rate is, but also what can make that rate fluctuate. Jason Pfeifer of Farm Bureau Insurance in Russell was kind enough to discuss the fascinating world of insurance rates with me. (visual of head hitting desk) (repeat as necessary)
#1- The rate for the community you live in. One would guess that insurance rates in a large community would be higher than small town living. Just look at the police reports of vandalism and theft and drive by shootings and loose zoo animals….Well, I think you get the point. The exposure to risk could be exponentially higher. Au Contraire Mon Ami. When you live in a small Mayberry RFD type community, there are less homes to spread out the cost of replacement risk, therefore-the rates are typically higher. In addition, many times the actual replacement cost for homes in smaller communities is higher due to the cost of materials and the lack of volume development construction. How many times have you wondered-Why is that home in Kansas City only $xxxxxxxx to build new, but here in Russell it is $XXXXXXXX. BECAUSE -It is much less expensive to bring in materials and contractors to build 8 homes at once, than it is to build one home at a time. Volume baby, volume. Just ask Wal-Mart. More homes in a community allows more opportunity to spread out the cost of risk. It’s all in the numbers. Even the number of claims for a particular zip code are researched over a 20 year period to forecast potential loss risk for the next 2-3 years for that community. Can you say Moore, Oklahoma? (God Bless’em.)
#2 – The field underwriting factors for your specific policy. This is where the “you” in “Your Home” comes in. Yes – YOU can personally have an impact on your insurance rate. Remember that Common Core Math conundrum? Homeowner’s insurance premiums are established by a very sophisticated rating system. There are MANY, MANY rating factors that play into the formula for insurance premium nirvana –potentially up to 100. I know – that’s a lot of fingers. But -the GREAT news? You are in control of most of them. How you ask? Allow me to elaborate.
The maintenance of your home. Field underwriters keep a pretty close eye on their “valuables” (your home) to make sure you are taking care of what they are insuring. Think of it as a check-up, but for your home. Is your roof in good repair, your siding, your gutters? Is water being directed away from the foundation? Can you see the foundation or is the grass to high? Are the windows cracked? Is the storm door hanging off? Is the property piled with trash, junk or garbage? Taking pride in your home and caring for it with regular maintenance can help you avoid expensive repairs and expensive insurance rates. And I feel certain you’ll get invited to the neighborhood block party.
• The protection of your home from risk. Do you have working smoke alarms in your home? Do you have deadbolts or secure locks on the entrances to the home? Do you have a security system? Is your garage secure from intruders? Don’t appear to be INVITING trouble with a hand addressed note. Protect your family, your home, and your belongings with reasonable care.
• Your personal credit score. Yes, there. I said it. It’s the elephant in the room. About every 2-3 years your personal credit score is reviewed with a “soft hit” (this does not affect your score). The better your credit score, the better your rating factor that gets plugged into that crazy equation. You see, it’s not only important to take good care of your physical house, you also need to keep your financial house in order. Yes, I know-being an adult is a big job and full of responsibility. Homeowners are considered to be adults. But this is YOUR house. Be the BOSS.
• Self-Insure the little stuff. Gone are the days when claims were filed for one broken window or the front storm door. The higher your deductible, the more you will save on your insurance premium. It also should eliminate nuisance claims for minor items. You should have at least the amount of your insurance deductible tucked away in a “Ruh-Roh Shaggy” fund to cover minor mishaps. Homeowner’s Insurance is no different than health insurance. It’s meant for the “big” stuff-not every little hang nail. Sometimes you have to suck it up, buttercup, to stay ahead in the long run.
So your house payment can go up (or down) due to a change in your insurance premium. The question is-are you doing everything you can to control that expense? If you are squinting right now, I am guessing there is work to be done.
Next in Part 3, we will walk thru the tricky and ever changing mine field of property taxes. Grab that box of wine and a straw. You’re gonna need it.