Over the past several months, mother nature had several surprises for us. It started with a 5.8 earthquake originating in Virginia. Here I was sitting in my living room and suddenly the whole house was shaking. A week later, came the powerful hurricane Irene that caused flood damage to so many houses. And the recent snow storm in October knocked down power for over 1,000,000 households in New Jersey. We also lost power for over 5 days.  What an experience!

I decided to take a closer look at our home insurance policy to find out what is covered and what is not covered. It is not an easy task and there are many exclusions. After speaking to our insurance agent and a claim adjustor, I made several important adjustments to our policy in key areas of coverage.

Earthquake Coverage – Regular policy does not provide any coverage for that. I know the probability of having an earthquake in New Jersey is very low. Because no one expects it, the cost of earthquake coverage for home owners in New Jersey is very reasonable. It was under $100 for a year for our house. I decided to add it to our policy for the extra peace of mind.

Flood Coverage – Regular policy does not provide coverage for that.  It is usually expensive and is required for homes in flood areas. For homes not in the flood area there is a less expensive option. For our house it was about $350 per year. Still, it will increase our insurance premium by more than 40%. Given the extensive flood and water damage caused by hurricane Irene, it can be a good option. Our house doesn’t have a history of water damage but no one can predict the future. For now, I haven’t added it to our policy.

Hurricane Deductible – There is a regular deductible and then there is a separate deductible for hurricanes. My original policy had a very high deductible for hurricanes, about 2% of the insured value, which would translate to thousands of dollars. This was an unpleasant surprise to many homeowners after hurricane Irene. The state of New Jersey issued a one time exception regarding the high deductible for damages due to Irene . I decided it was worth while to pay the extra premium and have only a $500 deductible.

Power Failure – We have lost power for more than 5 days during the snow storm in October, 2011. After trying to live in the cold house without electricity for 3 days, I have reached my limit and decided to stay in a hotel. I wanted to know if our insurance will cover the stay. There was no easy answer. I had to reach a claim adjustor to get an answer. In our case, we were covered and were pleasantly surprised that the insurance offered assistance in finding a hotel and even making a reservation. This was a big help since we had no access to the internet and most hotels were booked. Kudos to everyone who helped us!

Home insurance policies are not easy to understand and have many exclusions. It is important to review it with your insurance agent and decide on best coverage options for you.

USEFUL LINKS –

http://www.nj.gov/dep/njgs/enviroed/eqrisk.htm#freq
NJ Department of Environmental Protection assesses the risk of earthquake in New Jersey

To Buy or Rent is the question. With mortgage rates historically low and real estate prices down from their highs you might ask yourself – Is now the right time to buy a house? The answer depends on your personal circumstances.

We bought our house before our second daughter was born. We needed a bigger place and were looking for a 3 bedroom apartment. There were fewer choices available for 3 bedroom apartments and the rent prices were relatively high. At the same time, interest rates were getting lower and real estate prices were lower than a few years before. It was the right time for us to buy a house and settle down.

How do you know when is the right time to buy for you?

First, you need to figure out if you can afford to buy a house. You need to have a stable income to afford the monthly payments and expenses and you need to have enough money saved for the down payment and closing expenses.

Buyer’s closing costs can vary and typically are in the 3%-4% range from the purchase price. It is recommended to have at least 20% as a down payment. It is possible to buy a house with less than 20% down payment. In this case, you will have to pay Private Mortgage Insurance (PMI) which can vary from .3% to 1% from the mortgage amount depending on the percentage of the down payment and credit rating. For example, if you have a good credit rating and plan to have a down payment of 15% then your PMI payment will be about .31% or $31 per month for every $100,000 borrowed. If your down payment is 10% then your PMI is about .52% or $52 for every $100,000 borrowed.

Monthly payments include mortgage payment, property taxes, private mortgage insurance and home insurance. The calculator at the bottom can help with specific mortgage payment scenarios (it doesn’t include PMI payment calculation).

Here is an example of monthly payments –

In addition to closing costs and monthly payments, there are costs associated with renovations and maintenance. When we initially bought our house we have painted all the rooms and replaced the carpeting. Over time, we had to replace our roof, buy a new washer/dryer, buy a new refrigerator, replace the water heater and central air condition unit and remodel 2 bathrooms. We are also looking to replace the windows and remodel the kitchen. If you live in the house long enough, it is safe to assume that at some point you will have to do most of the renovations. This cost doesn’t exist when you rent and requires additional savings either upfront or gradually that can amount to several hundred dollars per month.

Another question to ask is how long do you plan to stay in the house. There are closing costs when you buy a house and when you sell a house. For example on a $350,000 house you can spend $30K-$40K in buying and selling closing costs alone. So if you plan to move away in the next 5-7 years it might not be a good idea to buy now.

NY Times has a good Buy vs. Rent calculator that helps to take many factors into consideration including extra cost for utilities like heating and hot water when you own a house and lost opportunity cost if you would invest the money in the stock market – http://www.nytimes.com/interactive/business/buy-rent-calculator.html. If your rent is low it appears to be more advantageous to continue to rent.

Besides financial reasons, there are psychological considerations of knowing that you own your home and you can make any renovations you want and you can live in that house for as long as you want. These factors can play an important role in the decision to buy vs. rent.

So, go ahead and figure out for yourself if you are ready to buy a house!