FAQ - real estate

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☂️ An umbrella policy is extra liability insurance that kicks in when your standard policies—like auto, homeowners, or renters insurance—reach their coverage limits. It’s designed to protect your assets and future income from large claims or lawsuits.

🔍 What It Covers

• Injuries to others (e.g. car accidents, slip-and-fall incidents)
• Damage to others’ property
• Legal fees and court costs
• Personal liability situations like libel, slander, or false arrest
• Liability from rental properties you own
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💡 How It Works

Let’s say you cause a car accident and are sued for $1 million. Your auto insurance covers $300,000. Without umbrella insurance, you’d be on the hook for the remaining $700,000. With a $1 million umbrella policy, it covers the excess and your legal defense.

🧠 Who Should Consider It

• Homeowners with significant equity
• Real estate investors (like you, George!)
• People with high net worth or savings
• Landlords, volunteers, or youth sports coaches
• Anyone with a public profile or active online presence
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💰 Typical Coverage & Cost

• Coverage starts at $1 million, often goes up to $5–10 million
• Costs around $200–$400 per year for $1 million in coverage
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Umbrella insurance is especially useful if you’re protecting rental properties, retirement savings, or other assets from unexpected liability.

A second mortgage or home equity loan is a way to borrow money using your home as collateral — without touching your original mortgage.

🏡 Here’s how it works:

• If you’ve built up equity in your home (meaning your home is worth more than what you owe on your mortgage), you can borrow against that value.
• The loan is called a second mortgage because it’s subordinate to your first mortgage — meaning if you default, the first lender gets paid first.

💰 Types of second mortgages:

• Home Equity Loan: You get a lump sum upfront and repay it over time with a fixed interest rate.
• HELOC (Home Equity Line of Credit): Works like a credit card — you draw funds as needed during a set period, then repay with interest. It usually has a variable rate.

📊 Pros:

• Access to large amounts of cash
• Lower interest rates than credit cards or personal loans
• Potential tax deductions if used for home improvements

⚠️ Cons:

• Adds a second monthly payment
• Risk of foreclosure if you can’t repay
• Closing costs and fees can be significant

An ARM (Adjustable-Rate Mortgage) loan is a type of mortgage where the interest rate varies over the life of the loan. It typically starts with a fixed interest rate for an initial period, which can last from one month to ten years. After this period, the interest rate adjusts periodically based on a specific benchmark or index, such as the U.S. Treasury rate or the LIBOR (London Interbank Offered Rate).

Here’s a quick breakdown:

1. Initial Fixed Period: The interest rate is fixed for a set number of years at the beginning of the loan (e.g., 5, 7, or 10 years).
2. Adjustment Period: After the initial period, the interest rate adjusts at regular intervals (e.g., annually).
3. Caps: ARMs often have rate caps that limit how much the interest rate can increase per adjustment period and over the life of the loan.

Pros:

• Initially lower interest rates compared to fixed-rate mortgages.
• Potentially lower monthly payments during the fixed period.
• Ideal for borrowers who plan to sell or refinance before the adjustable period begins.

Cons:

• Uncertainty in future interest rates and monthly payments.
• Risk of higher payments if interest rates rise significantly.
• Can be complex and harder to understand compared to fixed-rate mortgages.

PMI, or Private Mortgage Insurance, is a type of insurance that lenders require when homebuyers make a down payment of less than 20% of the home's purchase price. Here’s a brief breakdown:

Why PMI Exists

• Lender Protection: PMI safeguards the lender in case the borrower defaults on the loan. It helps to mitigate the lender's risk, especially when the buyer's equity in the home is minimal.
• Low Down Payment Option: It allows buyers to qualify for a mortgage with a smaller down payment, often as low as 3-5%, making homeownership more accessible.

How PMI Works

• Monthly Payments: Typically, the cost of PMI is added to your monthly mortgage payment.
• Upfront Payment Option: Some lenders might offer the option to pay PMI upfront as a lump sum at closing.
• Cost Factors: The cost of PMI can vary based on the loan amount, the loan-to-value (LTV) ratio, and the borrower's credit score. On average, it ranges from 0.3% to 1.5% of the original loan amount annually.

Removing PMI

• Automatic Termination: By law, PMI must be automatically canceled once the loan balance reaches 78% of the home's original value.
• Borrower-Initiated Cancellation: Borrowers can request PMI cancellation once they reach 80% loan-to-value ratio, meaning they’ve paid down 20% of the home’s value.

PMI can be a useful tool for those who want to buy a home with less upfront cash, but it’s essential to consider its additional cost in your financial planning.