Buying your first home is often a daunting experience—besides looking for the perfect home, you also need to sign reams of paperwork, learn unfamiliar terms and negotiate with sellers. If you're mortgaging your new home, you'll most likely need to purchase a homeowners insurance policy before the closing date. If you've never carried this type of insurance before, navigating carriers and policies can be an additional source of confusion. To help you out, read on for three things that you need to know about homeowners insurance when you're buying your first home.
1. You'll Need Proof of Homeowners Insurance Coverage Before You Close on Your Home
Practically all mortgage lenders require you to purchase homeowners insurance when you buy a home. After all, it represents a major investment for your lender as well—they don't want to take the risk that your home will be irreparably damaged while you're still paying the monthly mortgage. In fact, many lenders will roll your insurance premium into your monthly mortgage payment to ensure that your coverage doesn't lapse. Because of this, you'll need to provide proof of insurance to your lender before you close on your home.
2. Shop Around Instead of Accepting the Policy That Your Lender Offers You
It's common for lenders to partner with homeowners insurance carriers. Your lender may offer you a policy that has already been drafted for your home. In general, it's not a good idea to simply sign on to the insurance policy that your lender offers.
Homeowners insurance covers more than just the cost to rebuild your home. It also covers your personal belongings, and many insurance policies also provide liability coverage that protects you from being sued if anyone is injured on your property. The policy that your lender offers is likely to be lacking in these areas—from their perspective, they're more interested in the cost to rebuild your home than the cost to replace your personal belongings.
By rejecting your lender's insurance offer and shopping around, you're able to craft a policy that is better designed to protect you and your personal belongings instead of simply covering your home. You may also be able to find a better rate from another insurance carrier. You should start the process of shopping around for homeowners insurance a month before you close on your home—this gives you ample time to find a policy that meets your needs and fits within your budget.
3. Make Sure That Your Coverage Limit Exceeds the Rebuild Cost, Regardless of Market Value
A common misconception that first-time home buyers have about homeowners insurance is that it's based on the market value of the home. When you insure your home, the amount of coverage you receive is based entirely on the cost to rebuild it.
When you ask a homeowners insurance carrier for a quote, the agent will ask you for some information about the home that you're buying. This includes its square footage, the date it was built, and any renovations that may have been done by the previous homeowner. All of this information is entered into estimation software that gives them an accurate idea of how much it will cost to rebuild your home if it were totally destroyed.
The rebuild cost of your home has very little to do with its market value. If you're buying a home in a very desirable neighborhood where home prices are skyrocketing, the cost to rebuild your home may be much less than the money that you're paying to buy it. This doesn't mean that you're underinsured—the only thing that matters is restoring your home to its old condition if it ever needs extensive repairs, and that's based on the home's rebuild costs.
Conversely, a historic home in an area with a slow real estate market may cost much more to rebuild than it would sell for. Materials used to build historic homes were typically quite expensive, which drives up the cost to rebuild the home.
In practice, what this means is that you shouldn't pay attention to the market value of your new home when determining your coverage limit. It's important that your insurance company will pay the full cost of rebuilding your home if it suffers extensive damage—make sure that your homeowners coverage is greater than the rebuild cost, no matter what the market value of the home is.
Overall, the most important thing that you should keep in mind is that you should begin shopping for it a month before they close on the home. Contact several homeowners insurance carriers to find which one offers you the best quote, keeping in mind that you should always ensure that the coverage limit exceeds the cost to rebuild your home.
For more information, you will want to contact a company such as Ideal Insurance Agency.