Explain: By the end of this session, you will be able to discuss mortgage responsibilities and refinance options, determine how property taxes are paid, determine how to keep costs down on property taxes and homeowners insurance, and explain how to build home equity.

Transition Statement: Let’s begin by discussing your first financial responsibility as a homeowner – paying your mortgage payment on time each month. Making your monthly payment is extremely important. This responsibility will help you build your credit, avoid late fees, gain home equity – and eventually own your own home. Most importantly, paying your mortgage on time allows you to avoid a financial hardship, or even foreclosure on your property. As a homeowner, you must make your mortgage payment a priority.

Explain: Some homeowners are uncomfortable having a large mortgage debt, so they pay ahead on their loans to get out of debt sooner. Other people refinance their loan to get better interest rates. Understanding these two options can be helpful to you as a homeowner. Let’s first talk about getting ahead on your loan; then we will discuss refinancing.

Explain: Homeowners can expect to pay more interest throughout the life of a 30-year term mortgage than on a shorter-term mortgage. However, there are ways to minimize the total interest paid.

Question: What are some steps you can take to minimize the total interest you pay on your loan?

Instructor’s Note: Bullets will appear after discussion upon a second mouse click.

Explain: A simple step is to make more than the minimum monthly payment, if prepayment is allowed. Some people take out 30-year mortgages but make payments as if they were 15-year terms. By doing this, they are on track to pay off their mortgages in 15 years. However, if something happens and they cannot make the higher payment, they can make the 30-year payment.

Another option is to make an additional payment each year. If making this extra payment all at once is a challenge, consider dividing up the principal and interest portion of the payment into 12 equal amounts. This can shorten a 30-year mortgage by several years.

If your payment is $700 (excluding taxes and insurance), divide the payment by 12. This example shows that making an additional $58.33 payment toward the principal each month could save about seven years on the mortgage. This adds up to about $58,800. To calculate the exact savings on the loan, use an amortization schedule which you can get from your loan officer.

Explain: Another option many homeowners will encounter at some time is deciding whether to refinance. Refinancing consists of paying off a current loan through a new loan on the home. If done appropriately, Refinancing can be a great tool for homeowners.

Question: What are some reasons a home owner might consider refinancing?

Instructor’s Note: Bullets will appear after discussion upon a second mouse click. Highlight the points on Slides #4, #5 and #6.

Explain: Interest rates may have dropped since you purchased your home. By calculating the costs and benefits, you may determine that refinancing at a lower interest rate may be financially wise.

You may decide to choose a shorter-term loan that would allow you to build equity faster.

Explain: You feel your interest rates may increase with your adjustable rate mortgage or balloon mortgage and want to stabilize your payment by refinancing to a fixed-rate mortgage. Mortgage options are discussed in the Home-Buying Process module on the Home of My Own Web site.

Explain: Your financial situation may have changed since obtaining your original mortgage and you may wish to find a product that better meets your current and future needs (e.g., one with a better rate, lower payments or more flexible payment options).

Refinancing may allow you to tap into your home equity to pay for major expenses, such as college tuition.

Explain: When considering the option of refinancing, you also should consider how long you plan to live in the house. It takes about three years to see the benefit of refinancing because of the fees and costs associated with the process.

Refinancing also may be a good option if the lender is willing to work with you to negotiate fees based on your past relationship with the financial institution.

Explain: When a lender gives you a quote for a new loan, make sure the benefits outweigh the costs of refinancing your current loan. Some of the costs associated with refinancing include:

The Loan Application, Origination or Processing Fee

• Covers the expenses of preparing mortgage documents, legal service, borrower credit investigation, notary charges, appraisal fee, and any other fees.

The Title Examination or Search and Title Insurance

• Guarantees the title is good. Most lenders require title insurance to protect them against unrecorded title defects.

Explain: In addition to the application and title insurance fees, you also can expect to pay many of the same fees as when you purchased your home including:

Question: What fees would you expect to pay if you refinanced your property?

Instructor’s Note: Bullets will appear after discussion upon a second mouse click. Highlight fees listed on Slide #8.

Explain: For more information about the fees associated with loans, refer to The Mortgage Process Lesson Plan I or the Home-Buying Process Module.

If you discuss a refinance option with a lender and determine the loan product is not the best option, do not give up. Shop around. A different financial institution may offer a better loan option that meets your needs. Also, do not rush refinancing. In a few months interest rates could go down, putting you in a better position for refinancing.

Activity: Refer to the Mortgage Shopping Work Sheet to help you with this process. If you would like to read more on the mortgage process, refer to the Home-Buying Process module.

Transition Statement: Now that you are familiar with your mortgage responsibilities, let’s discuss property tax responsibilities.

Explain: One of the responsibilities all homeowners have is to pay their local property taxes. Some people see this as a disadvantage, but, in reality, they have probably already paid into the local property tax system. When renting, property taxes are included in the rent and the landlord pays taxes for the property.

An advantage to owning a home is that you may deduct property taxes on your income tax return. Consult with your income tax professional to see if you qualify for the deduction.

As a homeowner you are responsible for making sure your property taxes get paid. Most homeowners have their taxes included in their monthly mortgage payment, and the tax portion of the payment is deposited into an escrow account. After twelve months, the lender withdraws the money from the escrow account to pay the yearly property taxes to the local tax office. However, it is still the homeowner’s responsibility to make sure the lender pays the property taxes. There can be severe consequences for not paying your property taxes, including losing the property.

You can check to see if your mortgage company is making the payment by contacting the local taxing authority. If you live in New Mexico you can call the State of New Mexico Taxation and Revenue Department Property Tax Division at (505) 827-0870 or visit their Web site.

Question: How are these property taxes used?

Instructor’s Note: Bullet will appear after discussion upon a second mouse click.

Explain: Property taxes help fund the operations of local school systems and local government (state, county, city).

Explain: The amount of property taxes each homeowner owes is different. The amount paid is calculated on the value of the property (the higher your property is valued, the more property taxes owed).

The assessed value is determined by the local assessor’s office. Sometimes homeowners do not agree with the value given to their properties. When this happens, the homeowner has the right to dispute the assessed value. It is very important to know the correct process in your county for doing this. For more information, contact the county assessor or visit the county Web site.

The value given by the assessor is not the same as the property value determined by a certified appraiser.

Question: Why might the two values be different?

Explain: Certified appraisers base the value on the local housing market and the general condition of the home. The appraised value is frequently higher than the assessed value. The assessed value is determined by a County Assessor for tax purpose and is based on location, lot and house size. The appraised value is determined by a professional appraiser and considers amenities and the condition of the house. It is required by the lender to establish the amount of the loan that can be obtained. If the appraised value is lower than the assessed value, you may want to contact the assessor’s office and consider disputing the amount of the assessed value.

Some home owners may qualify for certain exemptions. In New Mexico these include single heads of family and veterans exemptions. Each has its own eligibility requirements. Other states may have similar or different exemptions, such as homestead exemptions. To find out if you qualify, contact your county assessor’s office.

Transition Statement: After your mortgage and taxes, your next important financial obligation as a home owner is homeowners insurance.

Explain: Purchasing homeowners insurance is important to protect your home. As the homeowner, you are responsible for keeping your insurance coverage low and up-to-date. Proper home maintenance will help you avoid claims and keep your insurance rates down.

Insurance does not pay for routine maintenance or damage resulting from neglect. The cost for proper care should be included in your overall budget. It is your responsibility to be the risk manager for your home.

If you do experience an insurable loss, you should consider all your options. It may benefit you to make the repairs yourself versus making a claim on your homeowners insurance policy. When you make a claim it is documented on your Comprehensive Loss Underwriting Exchange (CLUE) report. Your CLUE report is like your credit report. The difference is that your CLUE report tracks your home insurance claim history. If your CLUE report lists frequent claims, you may be charged higher premiums on future homeowners insurance policies, and it could cause your current rates to increase. Even worse, a poor CLUE report may disqualify you from obtaining future coverage.

The CLUE report also stays with the history of the property. If you plan to sell your house, a claim history on your CLUE report may cause the new homeowner to be charged higher insurance premiums. This could make your property less attractive. If you take care of your home and make appropriate repairs and improvements, your CLUE report should not be a problem.

Explain: Be sure to keep your homeowners insurance up-to-date.

Let your insurer know about alterations, additions and improvements to your home to maximize your insurance dollars by not being either under- or over-insured.

Consider shopping around for rates when your insurance policy comes up for renewal. The company that offered you the best rate when you purchased your property may not offer the most competitive rate when your policy comes up for renewal.

You may qualify for discounts if you combine your car, life and home insurance with one company.

Activity: Use the Homeowners Insurance Comparison Work Sheet and shop around to try to save money. You also can refer to The Home-Buying Process Module for more information about shopping and purchasing homeowners insurance.

Explain: If someone has been injured on your property or if a violent storm destroys your home, you will need to file a claim with your insurance company.

Remember, a homeowners policy is a contract between you and your insurance company. There are rules and procedures that you and your insurer must follow. Read your insurance policy to determine your responsibilities.

Most likely, you will need to take these seven steps to file a claim.

1. Report any crime to the police.
If you are the victim of a theft or your home has been vandalized, report it to the police. Get a police report and the names of law enforcement personnel with whom you speak.

2. Phone your agent or company immediately. Insurance policies place a time limit on filing claims. Find out the time limit. Ask questions: Am I covered? Does my claim exceed my deductible? (Your deductible is the amount of loss you agree to pay when you buy a policy.) How long will it take to process my claim? Will I need to obtain estimates for repairs to structural damage?

3. Make temporary repairs. Take reasonable steps to protect your property from further damage. Save receipts for what you spend and submit them to your insurance company for reimbursement.

4. Prepare a list of lost or damaged articles.
You will need to substantiate your loss. Avoid throwing out damaged items until the adjuster has visited your home. Consider photographing or videotaping the damage. Prepare a home inventory. Make a copy for your adjuster and supply copies of receipts from damaged items.

5. If you need to relocate, keep your receipts.
If your home is severely damaged and you need to find other accommodations while repairs are being made, keep records of all expenses incurred. Most homeowners insurance policies provide coverage for loss of use of your home.

6. Get claim forms.
Once your insurance company has been notified of your claim, the company is required to send the necessary claim forms to you by the end of a specified time period. (The time period varies from state to state.) Return the properly filled out forms as soon as possible to avoid delays.

7. Have an adjuster inspect the damage to your home. Your insurance company probably will arrange for the adjuster to come and inspect your home.

Explain: Once you and your insurance company agree on the terms of your settlement, state laws require that you be paid promptly. If you have any questions about the claim filing laws or need to file a complaint in New Mexico, contact the New Mexico Department of Insurance.

If you live in another state, you can contact your state department of insurance.

Transition Statement: In addition to homeowners insurance, you also may be required to pay mortgage insurance.

Explain: Mortgage insurance (MI) protects the mortgage holder if the borrower defaults on the loan. This insurance is usually required for government- secured loans (FHA, VA loans) or loans for which the amount financed is more than 80 percent of the property value.

Once the balance on your conventional mortgage loan is less than 80 percent of the property value, contact your mortgage company to remove this extra fee.

Transition Statement:
We have discussed financial and legal responsibilities home owners’ pay on their mortgage, taxes and insurance. Let’s now discuss big advantages you gain as you pay these expenses.

Explain: As you pay for your property, you build equity. Many homeowners purchase property for this reason - to build equity. Equity is the difference between the market value and the amount owed on the property.

These two examples illustrate this concept.

The market value of a house is $110,000. You owe $65,000 on the property. Your equity is $45,000.

The second example is a house with a market value of $102,000, and the amount owed is $90,000. The owner’s equity would be $12,000.

Explain: As a homeowner you can build equity by paying down your mortgage. The more you pay down your mortgage, the more equity you build.

Question: How else might you build equity?

Instructor’s Note: Bullets will appear after discussion upon a second mouse click.

Explain: You also can build equity in your neighborhood by keeping up the maintenance of your house and encouraging your neighbors to maintain their properties. The more homeowners do to help make their neighborhoods attractive, the more potential homebuyers will want to buy in those neighborhoods. Another way to build equity is to buy in an area where houses are selling quickly. This is not a guarantee that the houses will appreciate any faster than in another area. However, as long as demand continues for that specific area, the prices of the houses there should continue to go up.

It is possible that equity can decrease. If homeowners do not maintain their homes, crime goes up in a neighborhood or the economy slows, the overall market value can either remain steady or decrease. For example, if people start moving out of a neighborhood (for whatever reason) at a faster rate than people buy in the neighborhood, some sellers could lower the asking prices of their houses. This could cause a domino effect for other sellers. When one seller lowers the price, the others will probably follow. This could decrease the market value of your house.

Explain: Home equity loans are loans against the equity you have in your home. A home equity loan can be taken out as a second or junior mortgage. Some are fixed loans with a definite amount, while others are lines of credit. This process can become expensive and complicated if not done properly.

The difference between a home equity loan and a home refinance is that the primary mortgage loan will remain in place. Like the original mortgage, the loan will be secured by your house. If you default on the loan, the mortgage company will have the option to foreclose on your property.

Question: Why might you take out a home equity loan?

Explain: Reasons for taking out a home equity loan vary from person to person. Some borrow to consolidate bills, while others may do it to pay for a child’s education, make house repairs or pay medical expenses. Regardless of the reason, it is not recommended that you turn unsecured debt, such as credit card debt, into debt secured by your house.

Question: What risk do home equity loans present?

Explain: If you default on the loan, the mortgage company could foreclose on your property. You also face the risk of not being able to sell your property in the case of an emergency. You also want to consider the value of owning a home when you retire, and not having to make a monthly payments on a home equity loan.

Lesson Summary: Congratulations! You have completed “Financial Responsibilities” in this Being A Responsible Home Owner series of classes.

Today we have discussed mortgage responsibilities and refinance options, determined how property taxes are paid, determined how to keep down on cost of property taxes and homeowners insurance and explained how to build home equity.

Question: Are there any questions?