Homeowners Insurance 101

When buying a new home, knowing what types of insurance you’ll need is a key step of the process. This article will outline what you need to know about homeowners insurance, which is an essential part of home ownership for most.

Home Warranty, Homeowners Insurance & Mortgage Insurance – oh, my!

What’s what? As a first-time home buyer, or someone who hasn’t bought a home in a long time, it can be a bit confusing to figure out the difference. 

First things first, know the difference between a warranty and an insurance policy. A home warranty covers things like wear and tear on major appliances and systems of the home, whereas homeowner’s insurance protects you against occurrences like natural disasters and theft. For more information about home warranties, check out this article that goes into more detail on the topic!

Second, homeowner’s insurance and mortgage insurance aren’t the same thing. The most important thing to know about the difference between the two is this: Homeowner’s insurance protects you; mortgage insurance protects your lender.

Although it’s not required by law to have homeowners insurance, your mortgage lender will most likely require that you insure your home. Even if you don’t have a mortgage, it’s still usually a good idea to get homeowners insurance so you have coverage if disaster strikes. 

What does homeowners insurance cover?  

Homeowners insurance covers costs in the case of an event that damages your home, property, or personal belongings. It can also cover costs associated with accidents or injuries involving your home that you’re held legally responsible for. Most policies usually offer coverage in six different areas:

Dwelling: This type of coverage covers damage to your home and any structure attached to the house, such as a porch or deck. The amount should cover the cost to rebuild your home.

Other structures: This covers any other structures you may have on your property that aren’t attached to the house, such as sheds or fences. The amount is usually about 10% of your dwelling coverage.

Personal property: This covers the repair or replacement of any personal belongings that are damaged or stolen in a covered event. The amount is typically around 50-70% of your dwelling coverage.

Additional living expenses: This covers the cost of temporary living expenses while your home is being rebuilt or repaired following a covered event. The amount is usually around 20% of your dwelling coverage. 

Liability: This covers expenses associated with injuries or property damage done to others. The amount is typically between $100,000-$500,000.

Medical payments: This covers medical expenses associated with someone getting injured on your property (no matter who’s at fault), or a family member or pet injuring someone elsewhere. The amount is typically between $1,000-$5,000.  

What’s not covered?

Different policies vary in which types of events are or aren’t covered. However, no policy will cover absolutely everything that could happen to your home. Generally, most policies don’t cover damage from these causes:

  • Flooding; drain and sewer backup
  • Earthquakes and landslides
  • Infestations by pests, mold, or fungus
  • Wear and tear or neglect
  • Nuclear hazard
  • Government action and war
  • Power failure

You can, however, purchase flood, earthquake, or windstorm insurance separately. If you live in an area that’s susceptible to these hazards, it might be worth adding these in addition to your regular plan. 

How much will it cost?

On average, homeowners insurance costs between $480-$3,640 yearly, varying quite a bit by state. To find out what the average is for your state, check out this interactive map from NerdWallet.

One important number to know that impacts the price is the cost of rebuilding your home. You’ll want to get enough insurance to set your dwelling coverage limit at this cost. To calculate the right amount, find out your average local construction costs per square foot and multiply by the square footage of your home. Your insurer can help with this process, too. It’s important to get a fairly accurate estimate here so that you can make sure you’re completely covered without paying for more than you need.

Tips to lower your monthly premium

Looking to save on monthly costs? Here are a few different ways to shave down your bill without compromising on coverage:

  • Raise your deductible: Your deductible is the amount you’re responsible for paying before insurance kicks in to cover the rest. It’s common to have a deductible between $500 and $1,000. Choosing a plan with a higher deductible can lower your monthly premium, but make sure you’re confident you’ll be able to pay up to that amount if something does happen to your home.
  • Try bundling: You can bundle auto and home insurance with most well-known insurers, which could potentially save you up to 20%. Make sure to calculate what your costs would be if you were to get two separate policies, then compare to make sure you really are getting a good deal.
  • Add safety features to your home: You might be able to qualify for cheaper rates by adding features like deadbolts, window locks, and storm shutters to your home, or by upgrading old plumbing or electrical systems.
  • Boost your credit score: If your credit score is under 630, you might be paying higher rates because of it. (This doesn’t apply in California, Maryland, or Massachusetts, where insurers can’t consider your credit score as a factor when setting rates.) 
  • Update personal property coverage: Every so often, take a look at whether the total value of your belongings has changed significantly. If you’ve sold valuable items recently, it might be worth examining whether you still need as much coverage for your personal belongings.

Ultimately, getting homeowners insurance is almost always a wise choice, even though adding another item to your list of expenses may not be too enjoyable. If disaster strikes, you don’t want to be stuck footing a bill for tens or hundreds of thousands!

Want to find out more about mortgage insurance, and how it differs from homeowners insurance? We have an entire article on the topic, available here.

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