Buying your first home is an exciting but daunting process. There are many steps you need to take before you finally have the keys in your hands, and home insurance is one of them.
Here’s what you need to know to feel confident about buying home insurance for the first time.
What Home Insurance Is – and What It Isn’t
Homeowners insurance, sometimes called hazard insurance, covers damage caused by specific “perils” such as fires, windstorms, explosions, theft and vandalism.
Standard home insurance usually includes:
- Your home.
- Other structures (such as a garage, shed or fence).
- Personal property (such as furniture and electronics).
- Loss of use. For example, if you need to leave your home temporarily while it is being repaired due to a covered claim, this will cover the associated costs.
- Personal responsibility. Insurance if you are sued for injuring someone else or damaging their property.
- Medical payments. Cover if someone is injured on your property.
Don’t confuse home insurance with a home warranty, a plan that can replace or repair appliances and mechanical systems in your home. Unlike home insurance, a home warranty covers normal wear and tear. (Learn more about home warranties vs. home insurance.)
First home buyers can also interchange home insurance and private mortgage insurance. What’s the difference, you ask? “We get this question a lot,” says Michael Soler, a mortgage loan originator for Regions Bank in Melbourne, Florida. PMI is insurance for your lender in case you stop making payments. You may need to buy PMI if you put less than 20% down on a conventional loan.
If you are confused, don’t be afraid to ask. “It could be very expensive if you don’t,” says Soler.
Start Your Research Early
A great place to start is online for home insurance reviews, coverage descriptions and explanations of key terms. You can also work with an independent insurance agent or ask your realtor for a referral.
A real estate agent should have two or three companies they can refer you to, according to Josh Wright, real estate agent and owner of The Wright Group in Nashville, Tennessee. You will generally find the best rate and coverage if you compare quotes from multiple insurers.
Consider the Cost of Home Insurance
Avoid sticker shock by building the cost of homeowners insurance into your home buying budget. Get rough estimates by telling the insurance agent the areas you’re considering moving to and the area you’re targeting.
Note the age and construction materials of the homes you are viewing. Older homes typically cost more to insure than new builds, while homes built with durable materials such as brick can often be insured more cheaply.
Look for discounts to save on home insurance. For example, you can save by combining home and car insurance, installing protection devices in your home and becoming a new customer.
» MORE: What does home insurance cover?
Determine Your Deductible
If you have to file a claim, you’ll pay a deductible on your home insurance, so think about how much you can afford. The deductible is the amount that the insurance company deducts from your payment of insurance benefits. The higher the deductible, the lower the premium.
Ask your insurer or agent to pull quotes for several deductibles to see how premiums change. For example, homeowners could save an average of 11% annually by raising their deductible from $1,000 to $2,500, according to a recent NerdWallet analysis of homeowners insurance rates.
You may be fine with choosing a higher deductible if you have enough savings.
Ask about Additional Insurance
Home insurance does not cover every disaster. For example, a typical home insurance policy does not cover damage caused by floods or earthquakes.
If your new home is in a high-risk flood zone, your lender will likely require flood insurance. But it can be a good buy no matter where you live, because flooding can happen anywhere.
Homeowners in earthquake-prone areas, such as much of California, may also want to consider earthquake insurance, although it is not required.
» MORE: Estimate the cost of home insurance
Choose Your Coverage Limits
Home insurance covers damage to the structure of the house. Your home coverage limit should reflect the cost of replacing your home or the cost of rebuilding it if it were to be destroyed. This is not necessarily the same as the market value of the home.
Your insurer will often have access to public information about your home to estimate the cost of replacing it. You can confirm the amount by talking to the local supplier.
If you buy your policy online, your home information will likely be filled in automatically. “Don’t assume it’s right,” says Adam Bakonis, Mercury Insurance product manager. Instead, he recommends buyers check information such as square footage by comparing it to a listing or confirming with their real estate agent.
Extended replacement costs are optional coverage worth considering if your insurance company offers them. An additional percentage applies to cover your dwelling if your home is destroyed.
Let’s say your condo coverage is $200,000 and you have a 50% extended replacement cost. This means your insurance company will pay up to $300,000 to rebuild your home. Extended replacement costs act as a reserve in case construction costs rise and your home coverage is no longer sufficient to cover them.
Your personal belongings are covered as a percentage of your home cover, usually 50% or 70%. To make sure it’s enough, take a home inventory of all your belongings and valuables and add up the total value. You may need to purchase additional coverage for certain valuables, such as art or jewelry.
