Homeowners need to re-examine their financial protections. This year’s inflationary pressures and stock market volatility may prompt many to reevaluate their savings opportunities.
Homeownership has some useful features, including a forced savings mechanism and hedging against rents rising faster than income. But it also carries substantial risks from an individual and social perspective.
- Homeowners Insurance
Homeowners insurance offers financial protection for the structure of your house and your belongings in case of a disaster or damage. It also covers liability protection if someone is hurt on your property.
Inflation is one of the biggest reasons homeowners insurance premiums are rising. Inflation in materials and labor costs is driving up repairs and boosting insurance rates. Keep in mind that there is a big difference between home warranty and homeowners insurance. One covers things the other does not.
- Mortgage Interest Deduction
The mortgage interest deduction allows homeowners to deduct interest paid on a mortgage from their taxable income. This subsidy encourages households to leverage themselves with debt when buying homes and encourages high-income households to buy larger houses.
It is time to reform the mortgage interest deduction. It is regressive and distorted, and it does little to promote homeownership. Instead, a credit that is flat and does not vary with the size of a mortgage or other itemized deductions would provide substantial benefits to low-income households.
- Home Equity Lines of Credit
Many homeowners use the equity in their homes to access low-cost funds for renovations, large purchases or alternative debt repayment. They can choose to take out a home equity loan or a HELOC.
A HELOC allows borrowers to tap into the equity in their home, similar to a credit card, and only pay interest on the money they draw. They may be required to repay the credit line when their draw period ends and their mortgage payments begin.
- Homeowners’ Associations
Homeowners associations collect fees from property owners that go towards
improving the community. Purchasing a home or condominium in an HOA-governed community means agreeing to abide by predetermined rules, and failing to do so can lead to fines.
HOA fees also cover maintenance costs, insurance and common utilities for shared spaces. These can include shared walls and roofs in townhouse or condo developments. The association can also demand special one-time assessments if it is faced with costly repairs.
- Homeowners’ Association Insurance
Homeowners who live in neighborhood HOAs often pay association dues to help pay for community amenities like parks, playgrounds and pools. Some of the money goes into cash reserves for future repairs, and some pays for homeowners’ association insurance.
A typical HOA master policy covers the exterior and shared areas, but it doesn’t provide property damage or liability protection for your personal belongings. Your own homeowners or condo insurance should provide that coverage.
Other important provisions in a typical homeowners’ association include workers’ compensation and employee dishonesty bonds. Check your state laws for precise requirements.
- Homeowners Association Fees
Homeowners association fees are often a requirement if you live in a condo or other type of housing development. The association collects monthly or annual payments from its residents to help maintain and improve the building.
This can include everything from removing hanging tree limbs (that can damage roofs and windows) to keeping the grounds clean. If your association’s reserves aren’t enough to cover a major repair, it may charge you a special assessment. These can be very expensive.
- Homeowners Association Insurance Premiums
Homeowners associations often work with vendors for a variety of tasks, such as landscaping, pressure washing, repairs, and more. If these workers do not have worker’s comp, the HOA can be held liable for any injuries that occur.
In addition, liability insurance can help cover legal fees and settlements if someone in your household accidentally causes damage or injury to another person. It can also pay for minor medical bills, such as if a friend trips over an uneven step and sprains their ankle.
- Homeowners Association Taxes
Homeowners associations can be complicated entities when it comes to taxation. Associations that don’t file a return in time may be penalized.