Why There Is a Difference Between Insurance Values Vs. Sales Values

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One of the most frequently asked questions when it comes to home values is “why does the insurance value on my home show higher than the fair market value?” and to answer it, we spoke with an expert in property and casualty insurance.

Home Values Are Independent of One Another

The first thing that many homeowners do not realize is that each of the three areas where property values are determined is independent of the other.  Though they can be mixed together in some scenarios they each serve a different purpose, are determined based on varying parameters and largely do not impact each other.

Appraised /Fair Market Value

This value is based on a professional appraisal. Lenders will use this figure to determine the amount of financing to approve and one supplement to the appraiser’s assessment is area comparable sales of like-kind properties that sold in the preceding six month time period.  This value is somewhat impacted by market conditions and will fluctuate accordingly. Market conditions, whether the market is buyer-controlled or seller-centric will impact the fair market value, for example an area with fewer homes and more buyers for instance would reduce the market value.

Insurance Value

At one time, particularly prior to the 2007 housing market crash, insurance values fell right in the middle of appraised and assessed values but today that has changed dramatically given the subsequent economic conditions affecting the housing market.  Since insurance value refers to the amount it would cost to replace the entire home, the assessment is heavily impacted by the cost of materials and labor to replace or repair areas of the home.  Though market values have gone down since the market crash, insurance values are still seeing the inflationary increase as a result of increasing rebuilding costs.  One thing to keep in mind is that many insurance claims are partial – again affecting the costs to repair or rebuild and consequently impacting the insurance values on properties.

Assessed Value

Each local municipality has its own system and formula to determine the value of your home as per the amount of taxes you will owe on it.  The assessed value of a home will be used for the purpose of a tax base and it is typically reassessed every six to seven years in most locales with an increase as much as forty to fifty percent.  Homeowners that feel the assessed value is too high for their property may submit a tax appeal to their county board of review once or twice per year, depending on the county.  A tax appeal demonstrates to the board through comparable sales (obtained through Realtors) and other supporting documentation that the assessed value is too high and should therefore be reduced.
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Prior to the market crash of 2007, appraised values were the highest, insurance values next and assessed values were at the bottom of the scale.  Today, due to changing market trends and conditions there has been a shift to insurance values at the top in order to keep up with increasing costs, followed by market value and then finally assessed value.

If you would like to learn what your home’s market value is or want to explore options to sell your home – contact us today and we’ll share with you what we think you would get for your home today if you were to sell in today’s market.

Pay Down Your Mortgage Quicker with Bi-Weekly Mortgage Payments

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In most cases, yes! It’s essentially a process by which you make extra payments on your mortgage. That way, you save interest costs and pay off the loan faster.

How Does It Work?

You make a payment to your lender every two weeks instead of once a month. This means that each payment is equal to half of the monthly amount due. The result – you’re paying the equivalent of 13 full payments rather than the usual 12.

It gets even better! The full amount of the extra payment is applied toward the principal. And because the principal balance is the amount on which interest is calculated, paying down principal results in a reduction in accrued interest!

Let’s look a traditional payment monthly schedule vs. a bi-weekly schedule so you can see exactly how it works.

Example 1: Traditional monthly payments

Let’s assume you have a loan balance of $250,000 with a 6 percent interest rate and a 30-year loan term. In this example, your monthly payments are $1,498.88. So, over the life of the loan, you’d pay a total interest of about $289,595.

Example 2: Bi-weekly payments

Using the same loan balance and terms described above, the difference would be the following:

• $749.44 paid every two weeks

• About $225,490 paid in total interest

• This results in a savings of more than $64,000 in interest!

• In addition, the loan is paid off in 24 rather than 30 years

Bi-monthly payments are still a good strategy if you’re an individual who doesn’t plan to keep your house for 24 or 30 years. Why? Because bi-weekly payments still reduce principle, even over a short period of time.

For example, in the first year, the principle is reduced by nearly $1,600. And, at the end of the fifth year, the principle amount has been reduced by about $9,000!

How Do I Arrange Bi-Weekly Payments?

The first task is to contact lenders to find out if they do offer a bi-weekly payment schedule.

If they offer one, ask what the participation requirements are. In typical situations, lenders require you to have payments automatically withdrawn from your bank account since they dislike processing checks every two weeks.

Often, it’s the case that a one-time fee is charged for this service. The fee can be minimal or be in the several-hundred-dollar range, depending on the lender.

So, after all these benefits, how can there possibly be disadvantages to bi-weekly mortgage payments?

Well, the first disadvantage relates to a situation I mentioned above - the lender’s fee is very expensive for the service provided. In such a case, the costs may outweigh or cut down your overall savings.

A second disadvantage occurs when paying bi-weekly is too hard on your budget. Upfront, you need to make sure that you have the money available for the increased payments.

The final potential disadvantage relates to the length of time you plan to stay in your home. That can affect your overall savings on interest.

I recommend that you weigh the pros and cons of bi-weekly mortgage payments by using one of the many online calculators. Just enter your numbers and the calculator will give you a comparison.

If you’d like the assistance of an expert on the subject, contact us immediately!

New Changes to the HARP Loan Program Means More People Getting Much-Needed Help

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The announcement made recently by the Federal Housing Finance Agency about proposed changes to the Home Affordable Refinance Program (HARP) could mean that many more homeowners will get much-needed assistance during this difficult economic time.  Homeowners that are underwater have traditionally turned to HARP loans to help them refinance their homes, being able to keep them rather than losing them to foreclosure.  Here are the main differences between the old and the new programs and how they will potentially affect homeowners going through times of strife.

No More Glass Ceiling for HARP

With the old program there was a limit to how much borrowers could borrow with respect to thehome’s loan to value.  This posed a problem for many people that owed far more on the home than it was valued – given the steep decline in housing values during the past two or more years. 

New changes to the program will allow homeowners to refinance no matter how foregone the situation is with respect to more money owed on a property than its market value.  The elimination of the 125 LTV ceiling for fixed-rate Fannie Mae or Freddie Mac backed mortgages is by far the most impactful proposed change to the program.  This change will quite possibly help millions of people avoid undergoing foreclosure. 

Fewer Fees or Better Yet, No Fees For Some

As per the current HARP loan process, risk-based fees are assessed and applied to loans to protect the lender.  Considering borrowers’ credit profile, the lower the credit scores, the higher loan to value and that translates to greater risk to the lender.  Fees that are traditionally associated with this risk are a huge burden for buyers.

With the expected new HARP guidelines there will be no more risk-based fees for homeowners that refinance their home into short-term mortgages and fewer fees for others.


No Longer A Need For a Property Appraisal

The cost of getting an appraisal done on a home can get quite expensive and adds up when you factor in all the other costs of getting into a new home.  Most home purchases entail having an appraisal done on the home – at the buyer’s expense. 

The changes that are looking to be implemented soon for people seeking assistance through HARP will include eliminating the requirement of a new property appraisal.  The only thing that buyers need to be wary of is that there must be a reputable AVM estimate in lieu of the appraisal.

The Absence of Warranties That Put Lenders In a Stronghold
Lenders are at a huge risk when borrowers default on their loans and as a protective measure Fannie Mae and Freddie Mac guarantee those loans but not without a long list of warranties that protect the creditor.  At present, refinance loans that have these warranties or stipulations on them cause lenders to comb through each application very carefully before considering an approval.

With the proposed changes taking place, the warranties will be waived, reducing secondary exposure to lenders of buying back the loan in case of default or even indication of default.  The change will make it far easier for homeowners to obtain the refinance loan they seek to help get them out from underwater. 

More Time For Homeowners to Get Afloat

The HARP loan program began in April of 2009 and after an extension in March of this year (2011) the deadline was extended to June 30, 2012.

According to the list of projected enhancements to the program, the program’s deadline will be extended to December 31, 2013 – giving more homeowners more time to avail this opportunity.

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There are a few important things to mention regarding the upcoming announcement expected on Tuesday November 15th.  First, not only does the HARP loan apply only to homeowners that have a mortgage owned by Freddie Mac or Fannie Mae, the mortgage being refinanced must have been obtained on or before May 31, 2009.  Second, this applies only to homeowners who have not previously refinanced their home.

It is also important to note that these are projected changes – and they can change at any time contingent upon policy at Fannie Mae and Freddie Mac.