The Federal Reserve has just cut interest rates by .50% in response to growing concerns about the impact of the coronavirus on the economy. What does that mean for mortgage rates?

The Federal funds rate doesn’t move in lockstep with mortgage rates, particularly 30-year fixed mortgages. But mortgage rates are indeed expected to fall alongside the lowered Fed funds rate. The 30-year fixed-rate mortgage averaged 3.45% during the week of Feb. 27, and the 15-year fixed-rate mortgage dropped to 2.95%. If the yield on the 10-year Treasury continues to decline, mortgage rates could drop more as well.

As you know, the Federal Reserve does not set mortgage rates or any interest rate for that matter. The Federal Funds rate is a suggestion of what banks should charge each other to borrow money overnight so that banks can meet their reserve requirements. It is the shortest of available short-term rates.

The math

To see if it makes sense, you need to look at more than just the difference between the rate you have now and the new rate offered.
Important determinants are:

• how long you plan to be in your home and
• the cost of the refinance
• the length of the mortgage

So the first step is to look at the difference, or spread, between your current rate and the rate in the market. Then think about how long you’ll be in the home – if it is only a few years, it might not be worth it. Then look at costs, because a refinancing means paying significant closing costs that can often amount to a few thousand dollars. Then think about how long you want the mortgage to be – for example, if you have $100,000 left with 9 years to go, you might not want to lock in to a 30-year fixed mortgage, regardless of rate. Extending the term even with a lowered rate may end up costing you more in interest over the long run.

Cost of refinance

Costs involved in a refinance include appraisal fees, transfer taxes, origination fees, attorney fees, title insurance, flood certification fees, and recording fees, and lawyer’s fees.

We know that rates have fallen before, so those who wait to refinance could potentially see even better ones ahead. As the coronavirus continues to develop and its effects are felt around the globe, the mortgage market could see even more changes.

Shop around. That’s one of the most important tasks. Lenders will often reserve their best rate until you come back with a better one from a competitor. Get offers in writing for this reason.

The lower the interest rate is, the more palatable it is to pay for closing costs, so if you are saving $500 a month, you might find that the fees are made up in a few years.

If the potential saving from a lower-rate mortgage doesn’t make up for those costs, it may not make sense to refinance just yet.

What is required

There is pain in the refinancing process – similar to getting all your documents together to update your financial plan. The mortgage lender will want to see your latest mortgage and bank statements, a copy of property appraisal report from the appraiser, proof of income (including the previous year’s W-2 and federal tax return, as well as your most recent pay stub and any documentation on additional earnings), a list of your debts, and an inventory of your assets.

And after getting all that to the lender, they may come back and ask for even more documents and data. The whole thing can take several weeks.

Refinancing can be worth the time and effort – but each case is different. Give us a call for help if you want to figure out whether a refi is right for you.

Limitations on coverage

Generally, homeowners’ insurance policy covers the theft, damage, or destruction of your personal property, and there are several limitations. Your personal property is covered only for its actual cash value. This valuation takes into account the property’s depreciation, or its reduction in value as a result of wear and tear over time. As a result, the amount you get in an insurance settlement may be considerably less than what it costs to replace the item. That’s understandable for property like a car – but if the item were something that might actually increase in value over time (a work of art or a musical instrument) — then your real loss could be that much more.

The total coverage for all of your personal property is limited to 50% of the coverage on your home itself. This means that if your home is covered for $1,000,000, your entire personal property coverage — the protection for all of your possessions — is limited to $500,000. In addition, if the personal property is stolen from or destroyed in a secondary residence (like a summer home), your homeowners’ policy may limit your coverage to 10% of your personal property limit. In some cases, your valuables may not be covered at all if they are lost, stolen, or destroyed while you are traveling.

In addition, specific categories of personal property have separate limits of coverage. For some categories, your homeowners insurance policy may set a limit only on claims resulting from theft. This minimizes the insurance company’s exposure to fairly common occurrences. The damage or destruction of these items is less likely, so insurance companies are usually willing to cover them up to their actual cash value.

Improve coverage with endorsements or floaters

If you want to make sure that your valuables have better coverage, talk to your insurance agent. You may be able to buy additional coverage by modifying your policy with an endorsement or a “floater.” An endorsement is a written agreement to add (or subtract) coverage to the homeowners’ policy. Once it’s attached, the terms of the endorsement take precedence over the original terms. Personal property floaters can be bought as supplements to your homeowners’ policy. Endorsements and/or floaters can let you expand the types of losses you’re covered for, insure your valuables regardless of their location, and/or increase the amount of coverage on particular items or classes of items.

Your homeowners’ insurance may protect you against certain types of loss — losses due to theft, fire, or burst pipes, for instance. But do you know if it covers you for losses due to volcanic eruptions or civil commotions – or pandemics? An “open perils floater” could expand your coverage from the named perils specified in your homeowners’ policy to coverage for all types of losses.

A “personal effects floater” offers worldwide coverage for your personal property. With this, your personal property is insured regardless of where you take it. If you have children away at boarding school or college, you may want this to protect personal property away from home. If you travel, you can purchase this floater on a short-term basis to cover a specific trip. If you travel regularly with valuables, consider buying coverage on a permanent basis.

A “blanket coverage personal articles floater” raises the coverage limits for nine categories of personal property: jewelry, furs, cameras, musical instruments, silverware, fine arts, stamps, coins, and golf equipment. If no one item in your collection of valuables is worth over $2,500, this blanket coverage floater may be a good option for you. Note, though, that coverage limits still apply, they’ll just be higher.

Stand-alone policies

If your homeowners’ insurance policy offers inadequate or no protection for items with higher values, some companies offer valuable items insurance as stand-alone policies (or as floaters on their own homeowners’ policies). For maximum coverage, you may choose to have these items separately listed and specifically insured. In many such cases, the insurance company will require you to have each item independently appraised, which in a sense, settles the amount you would receive in the event of a loss even before the loss occurs. Once the insurance company accepts documentation establishing the worth of an item, there’ll be no need to haggle with the adjusters if you have to file a claim later.

However, even special policies will not cover your property in some cases. Although these policies offer very broad coverage, they won’t pay for losses due to nuclear explosions, acts of war, or intentional acts of destruction. In most cases, they also won’t pay for losses due to natural deterioration – like faded oil paintings, stained silver goblets, or the scratched doubloons in the coin collection.