Buying your first home is an exciting but daunting process. There are many steps to take before the keys are finally in your hands, and getting home insurance is one of them.
Here’s what you need to know to feel confident with your chosen font.
What is home insurance and what it is not
Home insurance, sometimes called hazard insurance, pays for damage caused by specific “perils” such as fire, storm, explosion, theft and vandalism.
A standard home insurance policy typically covers:
- Your house.
- Other Structures (such as a garage, shed or fence).
- Personal property (such as furniture and electronics).
- Additional living expenses. For example, if you need to leave your home temporarily while it is being repaired for a covered claim, this will cover the associated costs.
- Personal responsibility. Coverage if you are sued for injuring someone or damaging their property.
- Medical payments. Coverage 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 general wear and tear.
First-time home buyers may also confuse home insurance with private mortgage insurance. Wondering what the difference is? “We get that question often,” says Michael Soler, a mortgage lender 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% on a conventional loan.
If you’re confused, don’t be afraid to ask questions. “It could get really expensive if you don’t,” Soler says.
Start research early
A great place to start is online, where you’ll find home insurance reviews, descriptions of coverage and explanations of key terms. You can also work with an independent insurance agent or ask your real estate agent for recommendations.
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’ll usually find the best rate and coverage if you compare quotes from multiple insurers.
Think about home insurance costs
Avoid sticker shock by factoring the cost of home insurance into your home-buying budget. Get rough estimates by telling an insurance agent the areas you plan to move to and the square footage you’re aiming for.
Take note of the age and building materials of the homes you visit. Older homes generally cost more to insure than new builds, while homes built with durable materials like brick can often be insured for less.
To save on home insurance, look for discounts. For example, you could save by bundling home and auto insurance, installing protective devices in your home, and becoming a new customer.
Determine your deductible
You will pay a deductible if you have to file a claim, so think about how much you can afford. The higher the deductible, the lower the premium.
Ask your insurer or agent to pull quotes for multiple deductible amounts to see how the premiums change. For example, homeowners could save an average of 12% per year by increasing their deductible from $1,000 to $2,500, according to a recent NerdWallet analysis of homeowners insurance rates.
You may be comfortable choosing a higher deductible if you have enough savings.
Find out about supplementary insurance
Home insurance will not cover all claims. For example, a typical home insurance policy does not cover damage caused by floods and earthquakes.
If your new home is in a high-risk flood zone, your lender will likely require flood insurance. But it could be a worthwhile purchase no matter where you live, because flooding can happen anywhere.
Homeowners in earthquake-prone areas, such as much of California, may also consider earthquake insurance, although it is not required.
Choose your coverage limits
The home coverage of a home insurance policy covers damage to the structure of the home. Your home coverage limit should reflect the cost of replacing the home or the cost of rebuilding it if it is destroyed. This is not necessarily the same as the market value of the house.
Your insurer will often have access to public information about your home to estimate its replacement cost. You can confirm the amount by speaking to a local contractor.
If you buy a policy online, your home information will likely be filled in automatically. “Don’t assume this is correct,” says Adam Bakonis, product manager at Mercury Insurance. Instead, he recommends buyers double-check information like square footage by comparing it to the listing or confirming with their real estate agent.
Extended replacement cost is optional coverage to consider if your insurer offers it. It pays an additional percentage on top of your home coverage in case your home is destroyed.
Let’s say your home coverage is $200,000 and you have an extended replacement cost of 50%. This means your insurer will pay up to $300,000 to rebuild your home. Extended Replacement Cost acts as a buffer in case construction costs rise and your home coverage is no longer enough to cover them.
Your belongings are covered as a percentage of your accommodation coverage, usually 50% or 70%. To make sure that’s enough, take an inventory of all your big-ticket items and belongings, and add up the total value. You may need to purchase additional coverage for certain valuables such as artwork or jewelry.