A Guide to Homeowner’s Insurance
For the first-time home buyer, it can be easy to get overwhelmed with all the details and requirements involved in the process of buying their first home. And for many, understanding homeowner’s insurance and everything that goes along with it can be one of the most confusing.
In this post, you will learn everything you need to know about this important mortgage requirement, including why you need to have it, the different types, common coverage options, and more.
Why Is Homeowner’s Insurance Required When Buying a Home?
Your home will arguably be the largest investment you will ever make in your life. Homeowner’s insurance helps ensure that your primary asset and everything inside of it, as well as your personal finances, are protected should something happen to your home, like a fire, flood, or theft. Your insurance policy makes it possible for the damage to be repaired and for stolen items to be replaced without you shouldering all the cost.
Homeowner’s insurance also helps protect the homeowner against liability. For instance, if someone is injured on your property and chooses to sue you, your insurance will help protect you against financial ruin. Also, because your new home isn’t really yours until you pay off your mortgage, your mortgage lender will require this type of insurance to help minimize their risks.
Before You Buy – Tips for Getting the Best Insurance
Before you choose an insurance provider, there are a few things you should do to help ensure you are as prepared as you can be. The first is to create a home inventory. This should include everything you are bringing with you into the new home and their prices, including receipts or valuations where possible. This might seem like an exhaustive list, but it is the only way to fully guarantee everything will be covered under your policy. You will also need:
- Your driver’s license and social security number
- Your address
- Information about any recent repairs or updates in the home, including the cost associated with them
- Information about the home’s current condition, such as the age of the roof and whether anything needs to be replaced in the near future
What Should Your Homeowner’s Policy Cover?
There are six categories that should be covered under your homeowner’s insurance policy, and these include:
- Physical damage to the house
- Physical damage to other structures on the property
- Damage to or theft of personal property
- Additional living expenses
- Personal liability protection
- Medical expenses
Most standard policies do not provide coverage for damage caused by flooding or earthquakes, so if you live in an area where these types of natural disasters regularly occur, then you may be required to purchase add-on coverage. Other common gaps in coverage can include:
- Normal wear and tear
- Damage caused by animals, birds, or insects
- Damage that was deliberately caused by the homeowner
- Damage caused by pollution
- Damage caused by land movement (landslides, mudflows, etc.)
- Damage caused by war or overthrow of government
Is PMI the Same Thing as Homeowner’s Insurance?
No. PMI, or private mortgage insurance, is only designed to reduce the lender’s risk should you default on your mortgage loan. For most home loans, PMI is included in the monthly mortgage payment and typically ranges from 0.58% to 1.86% of the original loan amount.
Once you reach a point where you have established 20% equity in your home, you can request for your lender to remove the PMI from your mortgage payment. You can also avoid paying PMI outright if you put at least 20% down on your home when buying it.
What Effects the Cost of Homeowner’s Insurance?
The cost of homeowner’s insurance varies per homeowner because there are several factors that need to be considered by the insurance company when determining the policy’s rate. The following factors are what will typically impact how much you pay for home insurance:
- Age and condition of the home
- Amount of personal property to be protected
- Recently completed renovations that increased the home’s value
- Additional structures on the property
- Your credit score
- Risk attributes, like a swimming pool
- Home security systems and/or any disaster resistance attributes
- The deductible you choose (a higher deductible lowers your premiums)
- The home’s neighborhood and general location, including your regional risk for natural disasters
What Are the Best Ways to Reduce My Homeowner’s Insurance Policy Payment?
For a first-time homeowner, having the added monthly expense of homeowner’s insurance might be a surprise that they weren’t prepared to have to deal with. Luckily, there are some things you can do to help reduce your monthly cost if you feel that the cost is too high.
The quickest and most effective way to reduce your policy payment is to choose a higher deductible when purchasing your policy. It is important to keep in mind that a higher deductible will, of course, result in you being responsible for a higher amount of the repair or replacement costs, so you need to ensure that you can cover whatever deductible you choose. As a result, keeping an emergency fund with at least enough money to cover your deductible is always recommended.
Another way to lower your premium prices is to improve your credit score. This does take time, however, so it might not be the most effective way if you are planning to purchase your home soon. Additional tips for getting the lowest price for your policy premiums include:
- Install additional security (invest in additional deadlocks, smoke detectors, fire suppression system, security system, etc.)
- Update the home to make it safer and more appealing
- Choose an insurance company you already have and bundle your policies
- Ask about any potential discounts (military, first responders, travel associations, alumni programs, etc.)
- Avoid switching insurance companies often (many companies offer loyalty discounts)
- Compare several offers before choosing a policy
Buying home insurance can understandably feel stressful because you want to find the perfect balance of cost and protection. But it is really not as difficult as you might think. Armed with the above information, you will be in a better position to make a more informed decision, so the policy you purchase will be one that will protect your home and family without forcing you to spend more money than necessary.
