On the exciting journey to buying your first home, you’ll encounter a few things that aren’t quite as exciting as others. Some aspects of buying a home can even be a bit confusing, like homeowners insurance.
As a first time homebuyer with a mortgage, your lender will require that you have a homeowners insurance policy that is effective on your closing date. In some cases, your lender will allow you to have them billed directly for your first year’s premium. In other cases, you will have to pay the first year’s premium yourself. After that, your premium will be included in your mortgage payments, along with taxes.
Here are some first time homebuyer tips that make your homeowners insurance easier to understand.
Your homeowners insurance policy has three main parts.
1. Dwelling Coverage
This is the big one. Dwelling coverage covers the cost to rebuild the home itself. A good insurance agent will ask you thorough questions about the home including its square footage and construction. They will then use specialized software to calculate the cost of rebuilding the home if the home is damaged or if there is a total loss.
It’s important to note that the dwelling replacement cost is not the same as a market value. Housing markets can be volatile, and the price you pay for your home may differ from the insured value.
2. Personal Property
Your property, in this case, isn’t your yard and trees, it’s your stuff. We all have things that we’ve acquired over the years, including televisions, computers, clothing, jewelry, etc. In the event of damage to the home, like a fire, for instance, some or all of this personal property could be lost. Personal property coverage will pay to replace all or part of the loss for a covered claim.
As a quick tip, if you have a lot of jewelry, ask your agent about proper coverage for your valuables. Most policies provide relatively small limits of standard coverage for jewelry and some other types of items.
3. Personal Liability
Sometimes also called Family Liability coverage, personal liability coverage is there if you are sued because someone else was hurt. Accidents can happen, and if there is a lawsuit, you don’t have to go it alone. Your homeowners insurance policy provides coverage for some liability claims.
In most cases, your policy even provides for your legal defense. Increasing your personal liability coverage is one of the least costly changes you can make to your homeowners insurance policy. You may be able to double or triple your coverage for a few dollars per month.
Of the three main coverages on your homeowners insurance policy, personal property and personal liability are the coverages most likely to be underinsured.
What is a Rider or Endorsement?
Your homeowners insurance policy provides for basic coverages as detailed above. Your policy will only insure you for the coverages you purchase. Some risks that we might think would be covered in a standard homeowners policy aren’t covered it all. A rider or an endorsement changes the policy to add coverage for new risks or to expand existing coverages.
For example, many people would think that a sewer backup from the sewer lines into your home would be covered by your homeowners insurance policy. However, coverage for this situation usually requires that you purchase specific coverage called backup sewer and drain.
Similarly, floods are not covered by your homeowners insurance policy. If a pipe bursts and floods the kitchen, the cost to repair that damage is a valid claim. But if rising water comes in from outside during torrential rains, that damage would not be covered. Flood insurance is a separate product from your homeowners insurance policy. In both cases, the damage was caused by water, but the cause was different.
Special consideration for your valuables
The personal property coverage on your homeowners policy is designed to cover the basics. Your agent will probably ask you how much coverage you would like to add to your policy for personal property. Think of this as general coverage for standard household items.
If you have high-value jewelry, a gun collection, artwork, or other high-value items, the basic personal property coverage in your homeowners policy will not be enough to cover a loss for these items. Consider buying a personal articles policy which specifically covers those valuables. Your insurance company will require a recent receipt or a recent appraisal to properly ensure these high-value items.
The least expensive policy may meet the needs of your lender, but may not provide adequate coverage for you and your family.
Your lender’s interest in the property is similar to yours but limited to the property itself. Your lender is not the customer of the insurance company and your lender won’t help you if there is a loss and you find that your personal belongings were underinsured or that you didn’t have enough liability coverage.
As a first-time homebuyer, you will be introduced to a lot of new terminology from lenders, appraisers, home inspectors, and insurance agents. Most of this information and terminology won’t be important to remember after you purchased your home and moved in. Your homeowners insurance will protect you for as long as you live in the home. It’s important to understand what coverage you have and what the limits are to that coverage so you can properly insure your home and your family.
Don’t be afraid to ask questions when purchasing your homeowners insurance policy, and if the answers don’t sound right ask the question a different way or find another insurer who can offer better guidance.