If you’re a first-time home buyer, homeowners insurance might not be top of mind during a home search. So it’s understandable that the overpowering excitement when exploring the listings can carry you away until you forget other critical considerations.
Homeowners insurance protects against destruction or damage from fire, vandalism, and specific natural disasters listed in the policy. So important is home insurance that mortgage companies require this insurance coverage before financing you.
Now that you have identified that dream first home, how do you protect it against unforeseen dangers? This guide breaks down homeowners insurance, starting from what it covers to how to find the best policy for your first home. Read on.
How Does Homeowners Insurance Work?
A standard homeowners insurance policy protects your house but covers more than just the physical structure of your home. The main forms of homeowners insurance that are standard in the industry include:
- Actual Cash Value
This is coverage for the cost of your house and the value of your belongings after deducting depreciation.
- Replacement Cost
In a replacement value policy, you get the actual cash value of your home and possessions without the depreciation deduction. This homeowners insurance coverage allows you to repair or rebuild your home up to the value covered.
- Guaranteed Replacement Cost
A comprehensive homeowners insurance coverage that will pay for the total cost of repairs. The range can even exceed the policy limit but might come with a ceiling of how far beyond the cover the policy can pay.
What are Deductibles and Premiums?
A deductible is paid out of pocket before your insurance coverage kicks in. A higher deductible can lower your premium, but you will be responsible for paying more out of pocket in case of a claim.
The premium is the amount you pay for your insurance coverage. It is typically paid annually or monthly. When choosing a homeowners insurance policy, consider the deductible and the premium to find a policy that fits your budget and provides the coverage you need.
Why First-Time Home Buyers Need Homeowners Insurance
Homeowners insurance protects the largest investment you’ve made so far in case of any unforeseen circumstances. A first home holds more than financial value; for most people, it is a proud achievement with a lot of sentimental value.
Without homeowners insurance, you may be responsible for paying for any damages or losses out of pocket. Additionally, homeowners insurance can provide liability coverage if someone is injured on your property. This can protect you from expensive lawsuits and legal fees.
Your homeowner’s policy offers peace of mind, and you don’t have to live with the constant fear of the costly repairs likely to be incurred due to damage to your property. Whatever type of home you plan to buy, the best home insurance policy protects your treasured property and prevents financial ruin in case of covered perils.
What Does Homeowners Insurance Policy Cover?
Homeowner’s insurance policies typically provide coverage for the following:
Homeowners insurance protects the structure of your home and any other attached buildings, such as the deck or garage.
Personal Property Coverage
Personal property coverage covers your personal belongings, such as furniture, electronics, and clothing.
Other Structures Coverage
Detached structures on your property, such as the fence or shed, are covered under the other structures covered in your policy.
Personal Liability Coverage
This is coverage that protects you and your family against lawsuits related to property. The liability coverage covers financial losses from property damage and personal injuries to others and includes repair costs, legal fees, or medical bills.
Additional Living Expenses
If your home is not habitable after a fire or other covered peril, your homeowner’s insurance covers associated costs for temporary living, such as hotel bills.
Guest Medical Protection
The homeowner’s insurance policy’s guest medical protection pays for a guest’s resulting medical bills if the visitor accidentally gets hurt at your home.
What’s Not Covered?
There are many other surprising things your homeowner’s insurance covers, but what’s covered by a homeowners insurance policy varies based on many factors.
Generally, your homeowner’s insurance policy won’t cover the following:
- Earth movement, including earthquakes, sinkholes, shockwaves, mudslides, mudflow, volcanic eruption
- Flood damage or other water damage such as sewers or drains backflow, leaks from swimming pools or other properties, or water damage caused by fire, explosion, or theft
- Normal wear and tear
- Damage from lack of maintenance
- Items that exceed your policies insurance limit (artwork, jewelry, collectibles)
- Ordinance of law where you’re legally required to demolish, rebuild, renovate, or repair your home
- Power failure
- Intentional loss
- Damage caused by your animals
What Affects Homeowners Insurance Rates?
The location of your home can impact the cost of your homeowner’s insurance. Homes in areas prone to natural disasters or high crime rates may have higher insurance rates. Insurance providers have rating tiers for different areas in different states. Location may also positively impact your premiums, for instance, if your home is in a secure neighborhood with low crime rates or near a fire station.
Age of Home
Older homes are more prone to damage which could lead to regular claims. This increases your homeowner’s insurance premiums. In addition, the aging systems, such as electrical or plumbing, could fail, leading to property damage. An old home may also require renovations to be brought up to code, and it is advisable to add ordinance or law coverage as part of your homeowner’s insurance policy.
Insurance providers can use a homeowner’s credit-based insurance score as a rating factor to assess a client’s risk. A low credit score increases the level of risk the insurer is taking on and translates to higher premiums. In addition, research shows people with lower credit are more likely to file a claim which again increases the risk of insuring such home buyers.
If you have a history of insurance claims, this could increase your homeowner’s insurance premiums. Previous claims filed over a specified time affect your insurance rate because the insurer determines you’re more likely to file future claims. Therefore, a history of filing insurance claims indicates a trend, and insurers increase the premiums to cover the risk.
A homeowners insurance deductible is the amount you will pay out of pocket for a covered claim. A higher deductible lowers the premium cost of your policy but also costs you more out of pocket. You can shop for an insurance provider who offers diminishing deductibles on the homeowner’s insurance coverage to lower your out-of-pocket cost in case of a claim.
Tips to Buy Homeowners Insurance
Different insurance providers offer varying rates for homeowners insurance. When buying your first home, there is much to learn about protecting your valuable investment through this insurance policy. To help you get started when shopping for homeowners insurance, here are some ideas:
Tip 1: Assess Your Needs
Before buying homeowners insurance, assess your needs and determine your required coverage. Consider the value of your home and personal belongings and any potential risks in your area.
Tip 2: Get Quotes from Multiple Insurance Companies
Get quotes from at least three insurance companies to compare coverage and rates. Your mortgage company may provide a referral, but you must dig further and compare what other homeowners insurance providers offer.
Get quotes from multiple insurers, check their pricing and what’s included in the homeowner’s insurance coverages, and read testimonials and consumer reviews to narrow down on the best provider. Does the company provide the type of coverage you need? There are multiple online tools to compare insurance rates on the go.
Tip 3: Review Policy Details
Review the policy details carefully and talk to a professional who understands how insurance works. Your attorney or real estate agent is a good start, as these are your team members. They will help you get the coverage you need. Pay attention to the deductible, premium, and coverage limits.
Tips 4: Bundle Multiple Insurance Policies
Consider bundling your homeowner’s insurance with other policies, such as auto insurance, to save money. Bundling with the same provider earns you a multi-policy discount. For instance, you can buy an auto policy and home, condo, or renters insurance with the same company to get such a discount. In addition, the best providers can give you a bundled quote to help you make an informed decision.
Tip 5: Increase Your Deductible
When buying home insurance, remember that the higher your deductibles, the lower your premium. You’ll lower your premium by increasing your deductible (the amount you must pay out-of-pocket before the insurance company pays). When selecting a deductible, make sure such an amount is available in your budget in case of a claim.
Mistakes to Avoid When Buying Homeowners Insurance
Here are some common mistakes to avoid when buying homeowners insurance:
- Underestimating Coverage Needs: Ensure you have enough coverage to protect your investment. Underestimating your coverage needs can leave you underinsured in case of a claim.
- Assuming flood insurance is included: Most first-time homebuyers think the homeowner’s insurance policy includes flood coverage. Flood insurance protects your home and/or contents in case of flooding during torrential rains, hurricanes, and tropical storms.
- Focusing on Price Alone: While price is essential when choosing a policy, this is not the only factor. Consider the coverage and deductible to ensure you have the range you need.
- Not Reading the Policy Detail: Read the policy details carefully to understand every aspect of the coverage provided. Pay attention to the deductible, premium, and coverage limits.
- Confusing actual cash value vs. replacement cost coverage: Actual Cash Value only reimburses for the book value of a damaged item. In contrast, Replacement Cost gives you a brand-new replacement of the damaged or lost item.
- Ignoring the professionals: If you miss your real estate agent or other insurance professionals when buying a homeowners insurance policy, you risk making the wrong decision.
Frequently Asked Questions About Homeowners Insurance for First-Time Homebuyers
Q1. Is homeowners insurance required by law?
No, homeowners insurance is not required by law, but most lenders will require you to have a policy before they approve your mortgage.
Q2. How much coverage do I need?
The amount of coverage you need depends on the value of your home and personal belongings and any potential risks in your area.
Q3. Can I change my policy after I purchase it?
Yes, you can change your policy after you purchase it. However, reviewing the policy details carefully is essential to ensure that you have the coverage you need.
Homeowners insurance is not the first thing that comes to mind when shopping for your first home but it should. While it is not required by law, this coverage protects the most significant investment you have probably made in your adult life. Homeowners insurance can protect you from financial ruin in case of a fire or other unforeseen covered dangers. To get the best value, shop around and compare policies from different insurance companies. Your coverage needs should guide your choice and of course you have to ensure you get sufficient coverage for your property and the items in it. Go on and start shopping for the best homeowners insurance to protect your treasured investment!
Still overwhelmed by so much information when buying your first home? Relax. We’ve made home buying a fun and easy process through our ultimate home buying guide which provides you with all the information you need.