You have found your home and are headed towards the closing table. Congratulations, you are nearly done with the home buying process. There are only a handful of details left to complete, one of which is insurance. Have you already bought a policy or do you still have to choose a provider? Before you proceed any further with this, you should gain some information about homeowner's insurance policies.
A homeowner’s insurance policy, which is also referred to as hazard insurance, will be a requirement if you obtain a mortgage. Lenders require an insurance policy so that your house can be restored to the original condition if any damage occurs. This will prevent the value of the property from decreasing and allow necessary repairs to be made. If on the other hand you are going to purchase your house with cash, insurance is not mandatory, but is still recommended.
A homeowner’s policy provides you protection against theft, fire and a number of other things. The cost of the insurance policy will actually be included in your mortgage payment. If on other hand, your loan to value ratio is low, you will have the option to pay your premiums separately. However, your lender will probably charge you extra fees for this option.
With that being said, let us delve into the details. We will talk about what’s covered, what’s not, deductibles and in the end, mention a few other policies which you can buy if there is a need.
We have already mentioned that a lender will require you to buy a home insurance policy. This is not their only requirement and they have other terms as well.
The policy has to be the minimum of the loan amount.
If you live in an area prone to natural disasters, you will have to buy additional coverage because damage from these types of events are usually not included in a standard homeowner’s insurance policy. We will discuss these in detail later.
What is Covered
A standard home insurance policy will protect you from damage that is caused by wind, rain and fire. You will be offered coverage for the structure of your house, the installed fixtures, heating systems and electrical systems. Other elements such as patios, sidewalks and driveway are usually covered but may vary by insurance providers . If your property is burglarized , you will be covered, but there might be limits for valuable items like jewelry and collectables.
What is Not Covered
A standard home insurance policy does not cover a number of things. The most important of these is damage caused by flood and earthquakes. For both these disasters, separate polices are available and you will have to buy them if you want to be protected.
A deductible is the amount of money which you have to pay to the vendor when you make a claim. The deductible amount you choose has an effect on your premiums. If you can pay a larger amount, you will be offered lower premium rates.
Shopping Around for a Policy
Lenders do require you to buy a home insurance policy, but they provide you with the freedom to choose any provider you like. There are many insurance companies which charge varying rates and provide you with different coverage levels. Before you choose a provider, compare them on the basis of a number of factors such as the coverage levels, the premium amounts, deductibles and so on. Needless to say, a policy available at a lower rate will not always be a great choice because it may not provide you with adequate coverage. Also, review their claim policies and make sure you are satisfied with the terms.
Factors that Can Affect Your Premiums
The condition of your roof has a direct effect on your premiums. If your roof is made from a material that resists impact, you can get a discount of up to 20% for your premium rates.
In some cases, a roof can be considered uninsurable such as when you have a t-lock or wood shake roof. Should this be the case, you may have to replace the roof or exclude the roof from your policy.
A roof must pass qualification of your insurance provider, but this is not exactly the case with electrical systems. The only condition required by Insurance companies is that the electrical system meet current codes and should have been updated once in the last 25 years.
Location of the Fire Department
Surprising as it may seem, this does affect your premiums. If the fire department is more than a couple of miles away, you rates could be higher.
Home Age and Construction
If your home is old or bigger, you will have to pay higher premiums. Construction material also affects the rates; masonry and brick homes reduce premiums since they can reduce the damage caused from fire or wind.
We have already mentioned this; if you agree to pay a higher deductible, your premiums will reduce.
There are other factors a well which can affect premiums such as your credit scores, claims history and the location of your house.
Other Insurance Policies Which You May Need
When you live in a condo, there is a homeowner's association to take care of all exterior maintenance issues and repairs. This association already has an insurance policy, but their policy will cover the structure of the building and other common areas. Your individual unit is still your responsibility and you will not be protected by the association’s policy. In such a case, you can buy a separate policy for yourself that will protect your personal belongings. Should there be a theft, damage, personal injury or any other incident, you can easily make a claim and get coverage.
Administered by the Federal Emergency Management Agency or FEMA, flood insurance is required if you live in an area that is prone to flood. If risks of flood are high, lenders may make it mandatory to obtain flood coverage. Flood coverage is not included in a standard homeowner’s insurance policy. Many providers offer it if requested by the homeowner . If your carrier does not offer flood insurance, you may purchase a policy through FEMA.
Although not historically an issue here in the State of Colorado, it is still worth mentioning. An earthquake is another incident that is not covered by a standard homeowner’s insurance policy. If you live in an area where quakes are frequent, you may want to buy this policy. However, you will have to pay a deductible amount that is higher than what you will have to pay for the standard policy.
That covers a good portion of what you need to know about a basic homeowners policy. In future articles, we will discuss Private Mortgage Insurance and Mortgage Insurance Premiums.