After you’ve found the right home, been approved for financing, and your soon-to-be new home has been appraised, there’s still one more thing you’ll need before the process is complete—homeowners insurance.
In fact, your lender will require that you buy it. But why? And what does it protect? Keep reading to find out.
First the Basics
Homeowners insurance is an insurance policy that covers the cost of any losses or damages to your property in case of a fire, storm damage or an accident on your property. Lenders require it because they have an investment in your home—and without insurance, you’d have to pay for these costs on your own.
It’s worth pointing out that homeowners insurance is different than mortgage insurance, which protects the lender in the event you’re unable to pay off your loan. Mortgage insurance is often required if you make a down payment of less than 20% of the appraised value or the price of your home.
In any event, before your loan closes, your lender will require you to purchase homeowners insurance and show proof that you did. If you don’t get homeowners insurance, your lender will obtain coverage for you, but it’s usually more expensive.
How Much Does it Cost?
The cost of homeowners insurance varies depending on the type of policy you choose and the value, age and location of your home. Other factors, such as your credit rating, local costs for building materials and labor, and whether or not your home has a pool, can impact the cost as well.
Every policy also comes with a deductible, which is an amount that you’ll have to pay out-of-pocket if you file a claim for any losses or damages. Usually, the higher the premium you pay, the lower the deductible.
The good news is that once you pay your initial homeowners insurance premium at closing you don’t have to pay for the insurance in one lump sum going forward. Most likely, you’ll pay the premiums through an escrow account that your lender will set up for you, and it will be included in your monthly mortgage payment.
What Does it Cover?
Homeowners insurance typically covers your entire home and its furnishings, as well as other items of value you own, such as clothing and electronics. Most policies cover detached buildings on your property, such as garages and outdoor furniture and fences. They also cover the healthcare costs and legal fees if someone is injured while in your home.
There are some things homeowners insurance doesn’t cover. For instance, most policies provide protection if your home is damaged by high winds or fire, but not by “acts of God,” such as earthquake or flood. However, if your home is located where earthquakes or floods are common, you can get special coverage.
For example, if your policy doesn’t include flood protection, you could be eligible for coverage under the National Flood Insurance Program. The costs depend on the flood risk in your area, which you can find on the Federal Emergency Management Agency’s interactive flood maps.
Many homeowners insurance policies also do not include personal items like jewelry or collectibles. Bottom line—it’s wise to read the policy carefully before buying it.
Before ordering homeowners insurance, it’s a good idea to calculate the cost to repair or replace certain items in your home. That includes the cost of any furniture, valuables or vehicles, as well as what it would cost to live someplace else while your home is being repaired.
If you’re buying an older home, you might consider buying a home warranty. A home warranty covers the cost to repair the home’s plumbing and electrical systems and appliances for damages caused by normal wear and tear. Most home warranties last for one year, after which you can choose to renew it.
Have more questions about homeowners insurance? The mortgage loan experts at Right by You Mortgage are always happy to help. Simply give us a call at 1-877-552-2242 or contact us at firstname.lastname@example.org.