Entering into escrow on a home can be both exciting and stressful. The excitement comes from knowing you are close to moving into the new home. The stress comes from issues that will arise.
Budget for Closing Costs – Prepaid Loan Interest and Home Insurance Premiums
As part of any closing, you need to go through certain steps to make sure you are both getting what you think you have purchased as well as paying for it. Each of these steps has an associated cost, known as closing costs, and you have to pay them before you can take possession of the home. If you do not, the deal will not close and you will lose the home.
When going through escrow, costs associated with closing can accumulate quickly. Here is a closer look.
Prepaid loan interest is an ugly little surprise for many first time homebuyers. The lender will often require you to pay the interest that accumulates between the day the loan is funded and the day you are actually scheduled to make your first loan payment. Many people mistakenly believe they have roughly a month before they have to start paying. This is rarely the case, and the sudden requirement to pay a hundreds or thousands of dollars can be a nightmare. If at all possible, you should try to get the lender to fund the loan as close as possible to the actual closing date, even on it. Try to avoid closing the loan on a Monday. The lender will have to fund the loan the previous work week, which means interest will be growing.
Homeowners insurance is something you are going to need and most people expect as much when buying a home. If you are not informed, however, you will be surprised at closing when you find out you have to pay the full premium for the first year of the policy. Depending on the value of your purchase, this can add a couple hundred dollars to thousands of dollars onto your closing costs. Again, it is important to budget for this cost when putting funds together prior to purchasing a home.
If you are going to purchase a home, you are going to have to pay these two items at closing. Make sure you budget for them to avoid running into cash flow problems.
Last year the UK's average premium for Buildings Insurance increased by 1% to just over £205 and the average for Contents Insurance rose to £151, up 2%. But within the market we've seen some much bigger rises – if you're with Norwich Union you'll have seen your premium rise by around 6%.
So what's going on? Every year we see premiums rising. Surely with so much competition in the home insurance market, you wouldn't expect to see such inexorable rises in premiums?
Let's consider the situation more carefully.
The cost of repairing and rebuilding houses is a reflection of the rising price of labour and building materials. This means that cost to the insurers of claims under the buildings cover similarly rises. So as their costs rise, so do your premiums. And there's also the indisputable fact that cost inflation also affects the insurance companies own operating costs. Wherever possible, they're bound to add a little extra on for that!
Then there's that lovely British weather. Michael Fish could be forgiven for believing we don't live in a hurricane zone, but nevertheless it's a fact that storms, and especially floods, are becoming ever more frequent. Flood damage can be particularly destructive with, according to the Association of British Insurers, the average insurance claim ranging between £15,000 and £30,000. And during the last 18 months we have seen particularly destructive floods create headline news at Helmsley in North Yorkshire, Carlisle, and Boscastle in Cornwall. Those events must have cost the insurance companies multi-millions.
The other area where costs have been rising is burglary. The average burglary claim has now risen to around £1,400. There seem to be two reasons – firstly burglars are finding pickings easier to come by and move on. Modern family homes are packed with valuable electronic gismos – from laptops to I pods, digital cameras and flat screen TV's. The other reason is that burglars are targeting well-off neighbourhoods more and more.
Against this background the insurance companies are able to price home and contents insurance down to individual postcodes. If their records show a problem with flooding, or subsidence, or an increasing incidence of burglary in you immediate area, their computers will load your premium to reflect the additional risk.
Your no-claims discount will only serve to offset these upward pressures to a certain extent. And don't forget that once you have a five years no-claims record, your discount doesn't increase, it's capped. Thereafter, all the premium increases will land fully in your lap.
So what can you do to save money?
The most important step by far, is to shop around every year for the best available deal. Maybe it's a chore, but thirty or forty minutes on the Internet (including ten minutes on this web site!) will yield you results. Within that space of time you'll have found the cheapest insurer and, as an online customer, you'll probably have qualified for an additional 10% discount. Then you can always agree to pay by direct debit – that'll also trim off a bit more.
Of course there are other things you can do, especially in the arena of home security. Join the local neighbourhood watch scheme, install security locks on your windows, fit external security lighting, up-grade the locks on your doors and get a burglar alarm. Added security will earn you discounts on your insurance but will cost you money to install! Perhaps the added peace of mind alone will be worth the cost. Only the local neighbourhood watch scheme arrives free!
The best general rule is don't stick with the same insurance company too long. Keep them on their toes. They have a tendency to take loyal customers for granted. Yes, it really does pay to shop around – try it and prove it to yourself!