Home Insurance And Affordability

Have you opened your insurance premium notice lately? No? Afraid to? Homeowner’s insurance policies have skyrocketed. Policies are being canceled, premiums increase and renewals are being denied. And this is for people with zero claims and good credit.

We are all too aware of the disasters, both natural and man-made, in recent months that have caused insurance companies to pay record amounts in claims. For those same insurance companies to stay in business they typically have to stay profitable. Make money, keep doors open. Cancel bad apples, increase premiums or some combination in between. But homeowners insurance rate increases can also hurt those trying to buy a home. Not just finding a policy, but qualifying for the mortgage.

Take someone buying their first home using an FHA loan. They’ve saved up their money for down payment and closing costs, paid their bills on time and qualified for a new home loan. Let’s also say that even though their new house payment will be the same as the rent they’re now paying, their debt ratios are at their suggested FHA house payment limit of 29%.

A person making $3,000 per month could qualify for about $112,000, using FHA’s housing ratio of 29% and a 30 year-fixed rate of 6.75%. (29% of $3,000 = $870 PITI). That figure is used by estimating homeowners insurance of $575 annually, or $47 per month.

Now let’s say that same policy has doubled from $575 to $1,150 per year. That makes their house payment go up another $47. That drops the qualifying loan amount from $112,000 to $105,000!

Big deal, you say? You bet it’s a big deal. Especially to those trying to buy their first home. People who have seen their insurance premiums rise, through no fault of their own, are either having to wait to buy a new home or buy a smaller one instead.

But that’s really just important for first time homebuyers, right? Not really. It can have a broader impact.

Homeowners who refinance a mortgage may often roll closing costs into their new loan, including their annual insurance premium. If a policy used to be $1,500 per year and now is $3,200 then the cost of that new policy rises sharply over the term of the new mortgage. At 6.75% over 30 years, that $3,200 policy costs $7,522.

Do you have an adjustable rate mortgage? When, not if, your rate goes up you will also see an increase in total housepayment to go along with the new higher insurance premium. If your debt ratios are uncomfortable now, higher insurance premiums for those with escrow or impound accounts will pinch just a little harder.

Article continued at http://realtytimes.com/rtcpages/20020708_hminsurance.htm


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