Avoid these money mistakes

In “12 Money Mistakes That Could Cost You $1,000,000,” from our February 2008 issue, the Consumer Reports Money Lab examined several common financial blunders and explained how to avoid them. The Money Lab revealed these two home-related blunders:

UNDERINSURING YOUR HOME
Even with the recent retreat in home prices, if you’ve lived in the same house for 10 years, it’s likely to be worth 54 to 104 percent more than you paid for it, depending on where you live. But if you haven’t updated your homeowners insurance and disaster strikes, you could lose those gains.

All told, 55 percent of residential property in the U.S. is undervalued for insurance purposes, according to Castle Inspection Service, which conducts valuations for insurance companies. The average shortfall: 28 percent.

Using metropolitan-area home prices as tracked by the National Association of Realtors, we picked a $71,700, median-priced home in Elmira, New York., and an $865,000 house in the San Jose, California, area. We subtracted the value of the land, which is theoretically indestructible, and multiplied the remainder by that 28 percent shortfall. The Money Lab estimates insufficient insurance could cost $16,000 to $194,000.

Ask your insurer to reassess the replacement cost of your home and adjust coverage accordingly. Buy an inflation-guard endorsement. Make sure your policy would pay to rebuild to the current housing code where you live.

Also follow our expert cost-shaving advice to cut your insurance premiums:

Shop around. Prices vary from one company to another. Call insurers to compare prices, or check their Web sites. Your state insurance department may also list prices offered by major insurers.

Ask for discounts. Many companies will cut your rate by as much as 10 to 15 percent if you are over age 55. Some companies will also grant you discounts for smoke detectors, burglar alarms, or dead-bolt locks.

Reap rewards for loyalty. Some insurers cut premiums by 5 percent if you’ve been with them for three to five years. If you’ve stuck with the company for more than six years, you may be able to land a 10 percent discount.

Raise your deductible. Increasing your deductible from $500 to $1,000 should cut your premium by 25 percent.

Bundle your plans. If you use the same insurer for your homeowners and your auto insurance, you should be able to qualify for a discount of 5 to 15 percent on each policy.

OVERPAYING FOR YOUR MORTGAGE
The annual percentage rates on mortgages in a given area can vary by close to a percentage point. That might not seem like much, but over a 30-year term, it adds up to a bundle.

HSH Associates, which publishes mortgage data, told us the range on 30-year fixed-rate mortgages in New Jersey in November 2007 was 5.875 to 6.625 percent. We applied that to a purchase of a $299,000 home, assuming a 20 percent down payment and the resulting $239,000 mortgage. Over 30 years, the higher-priced mortgage would cost $360,000, while the lower-priced one cost only $333,000 in 2008 dollars.

Shop for the best mortgage rate by checking local banks, your credit union, big-lender Web sites, mortgage brokers, and mortgage-related Web sites.

Read “Remodeling: Best ways to pay for it now” for detailed information on how to pay for home-improvement projects.

Illustration by Carl Wiens