Summary: This article gives a basic overview of homeowners insurance and is intended for first-time home buyers who are new to the subject.
Are you planning to buy your first home in the near future? If so, you should reading up on homeowners insurance as well. Your mortgage lender will require you to have a home insurance policy prior to closing day. In fact, you’ll probably have to bring the policy with you when you close on the home.
This is one of the many things a first-time home buyer should know about homeowners insurance. Here are ten more things you should know…
What to Know About Homeowners Insurance
Getting a homeowners insurance policy is harder today than it was a few years ago. Our economic recession has had a lot to do with this. Everything is harder to get these days — mortgage loans, car loans, insurance coverage, etc. So you may have to shop around to get the kind of coverage you want, and you should definitely get multiple quotes to compare the cost from one provider to the next.
A couple of definitions you should know: The homeowners insurance premium is the amount you pay for coverage. The deductible is what you will pay in the event of a claim, before the insurance company will pay the rest.
Premiums and deductibles generally have an inverse relationship. That is, you can lower your premium by raising your deductible. This is a strategy recommended by many in the finance industry. The Insurance Information Institute says that “If you can afford to raise your deductible to $1,000, you may save as much as 25 percent [on your premiums].”
In the U.S., the average cost of a homeowners insurance policy is around $800 per year. This is for the premium. The deductible varies from one policy to another and can be raised or lowered by the homeowner.
Most homeowners insurance policies do not cover floods. So if you live in an area that’s prone to flooding, you should get a separate policy (or an add-on) for flood insurance.
When choosing a policy, you will probably have to choose between replacement cost and actual cash value. These terms relate to the contents of your home, but they are two different things. Replacement cost coverage gives you more protection than cash value, because it covers the cost of replacing items even if they cost more than when you bought them (appreciation). Cash value only covers items up to the amount you paid.
You can get quotes for a homeowners insurance policy online, which will save you plenty of time and energy. This is also a great way to compare policies of multiple insurance companies at once.
Citation Note: The original version of this article was written by Brandon Cornett. Brandon is the publisher of the Home Buying Institute, which includes one of the largest libraries of mortgage advice for home buyers.