Homeowners need 'landlord insurance' before renting
Many people buy a new house and convert their old one into a rental. The strategy raises key insurance issues.
Q. We are buying a new home, but we plan to keep our current house and rent it out to tenants. Will the homeowners insurance policy we have on our current house cover us if anything goes wrong after the tenant moves in?
A. No. You need to tell your insurance agent about your plans and arrange a new "landlord" policy, sometimes called "rental-dwelling" insurance.
A landlord's policy provides the same basic protection that a typical homeowners' plan does. But it usually costs about 25 percent more, in part because insurers are wary that your future tenant won't take care of the property as well as you do today.
Most landlord policies also provide you with a reimbursement for the loss of rental income if the property can't be rented while the home is repaired or even totally rebuilt after a covered loss.
It's important to remember, though, that a landlord policy doesn't cover the loss of a tenant's personal possessions. To avoid possible disputes in the future, make sure that the lease the tenant signs includes a provision that he or she purchase a separate renters insurance policy and then provide you with a copy of the document.
You also should notify your current lender about your plan to lease out the home. Some mortgage contracts allow a bank to modify its loan-repayment arrangement or even demand that the entire balance be paid off in a lump sum if the borrower doesn't live there anymore.
Q. We are just settling into our first home, and there's no way that we'll be able to get all of the paperwork together we need in order to file our federal income-tax return by the April 15 deadline. How can we get an extension? Does it cost anything? Also, would we have to provide a legitimate reason for the request to file later in the year?
A. Filing for an extension is free and easy to do. Just fill out IRS Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, and mail it to the agency's address that appears on the document. Or, do it online at www.irs.gov.
No explanation is needed. You'll get a six-month extension if the IRS receives the form by April 15.
It's important to note, though, that filing only pushes back the deadline for sending in a completed return to Oct. 15. Form 4868 also requires you to estimate the taxes you may owe and attach a check for the amount by the usual April 15 deadline. You'll be subject to penalties and interest if you underestimate the amount or fail to send a check at all.
Q. We recently refinanced our $145,000 mortgage with a 4 percent fixed-rate loan. Our new monthly payment will be $692, which is $125 less than we were paying before. But what if we kept paying the old amount each month by adding $125 directly to the loan's outstanding balance? How much money would we save, and how much sooner would we own our home mortgage-free?
A. Many homeowners across the U.S. are adopting the strategy that you are contemplating. It's a wise move: refinancing at today's ultralow rates and then using the savings to begin making a hefty principal-only payment each month, assuming that you don't need the money for other reasons.
If you simply stick to the $692-a-month figure the bank gave you, you would pay $104,211 in finance charges over the life of the 30-year mortgage. If you instead take your $125-per-month windfall and apply it directly to your new loan, you'd pay $74,809 in interest and pay the loan off in August 2037.
In other words, you'd save $29,401 in interest over the life of the mortgage and retire the debt seven years, seven months sooner.
Real estate trivia: The average homebuyer last year made a 14 percent down payment, or about $32,141, according to a review of 1.5 million transactions across the U.S. that was conducted by real estate giant RealtyTrac.
Our booklet "Free and Clear: Getting the Mortgage Monkey off Your Back" provides several simple but effective strategies to painlessly pay a home-loan off early and save tens of thousands in finance charges. For a copy, send $4 and a self-addressed, stamped envelope to David Myers, P.O. Box 4405, Culver City, CA 90231-4405. Net proceeds go to the American Red Cross.
• For the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 4405, Culver City, CA 90231-4405.
© 2015, Cowles Syndicate Inc.