Buying Home Insurance — The First Time

Do you have to have homeowner's insurance when you buy a house?

You have to show proof that you have homeowner's insurance before your lender will give you the keys to your house and fund your loan. While you are paying down your mortgage, it is in your lender's best interest to make sure the property is insured. This is because they will still have a lien on the property until they are paid in full for your house.

If you are buying your new home with cash or an unsecured line of credit, you won't have to show proof of homeowner's insurance before the closing (such as a credit card or personal loan). Home insurance isn't required by law in any state, but you should still think carefully about getting it to protect the money you've put into your home.

How to compare different types of home insurance

Your loan officer will tell you when it's time to buy homeowner's insurance as part of the process of getting your mortgage approved. On the other hand, once you know your new address, you can start looking for a new insurance policy. When you start looking for homeowners insurance early, you give yourself more time to find the best coverage for your needs and find ways to save money.

Even if your lender makes a suggestion, it is a good idea to look into the prices, coverages, and customer ratings of the different insurance providers before making a final choice. Switching home insurance companies or getting your car insurance and home insurance from the same company can often save the policyholder money. Find ways to lower the cost of your homeowner's insurance.

What are the most important parts of a homeowner's policy, and why?

1 - Check the limits of both your personal property coverage and your liability coverage.

Coverage C of your homeowner's insurance policy protects your personal property, which includes your clothes, furniture, electronics, and jewelry. Check to see if the limit is high enough to cover all of your belongings. Keep in mind that your insurance company may set a "sublimit" for certain types of coverage, and some things may fall into one of those categories. Also, if you have valuable things like works of art or jewelry, you may need to add a "rider" to your insurance to make sure they are covered.

Coverage E, which is also called "liability," protects you from having to pay money out of your own pocket if an accident hurts someone else. Make sure that the liability limit you choose is enough to cover what you have now in assets. Do your best to do this. Most homeowner's insurance policies have a liability limit of $500,000 or less. If you need more protection, you can buy umbrella insurance, which adds another layer of liability protection to your existing home and car policies.

2 - Watch out for exclusions

There will be a list of things that a normal homeowners insurance policy doesn't cover, and this list will be different depending on where you buy your insurance. There are many different kinds of natural disasters. Some of them are earthquakes, landslides, mudflows, and flooding.

If you are in danger of something that isn't covered by your policy, you should ask your home insurance agent or company if you can buy extra protection for things that aren't covered by your policy.

3 - Find out the policy deductibles

When getting homeowners insurance for the first time, it is very important to pay close attention to the damage deductible. Because you are responsible for paying the same amount as your deductible, it is important to make sure that your deductible is an amount you can afford.

Unlike the deductible you pay for your car insurance, the deductible you pay for your home insurance is not always a fixed amount. It can be a certain percentage of how much your insurance covers for your home. There is also a chance that your policy's deductible will be split. This means that for most of your claims, you will get a fixed amount of money. However, a percentage may be taken off for damage caused by wind or other risks.

Example

Let's say you have a claim for $7,000 worth of wind damage. If your homeowner's insurance policy has a 2% deductible and your home is insured for $150,000, you will have to pay $3,000 and your insurance company will pay the other $4,000.

How the mortgage and escrow affect how home insurance is handled

Most first-time buyers put money in the escrow account to pay for their homeowner's insurance. Escrow accounts are used to hold the money you set aside for your home's insurance and property taxes. You will also have to pay a set amount each month on top of your regular mortgage payment. Most of the time, this extra amount is a few hundred dollars. Your mortgage servicer or lender will put these extra payments into a separate account called an escrow account.

When the time comes, the lender will take money from the escrow account to pay the homeowner's insurance premium and the property tax bill on your behalf. Homeowners who want to make sure they always pay their home insurance and property taxes on time should set up an escrow account. Some homeowners would rather pay their taxes and insurance premiums through a monthly escrow account than all at once or twice a year. Find out more about the different ways that you can pay for home insurance.

Is escrow really necessary?

If your loan is backed by the Federal Housing Administration (FHA), you have to have an escrow account, so you will have to open one. Conventional loans can be changed in both ways. If your loan amount is more than 80% of the value of your home, your lender will almost certainly require you to open an escrow account. When you don't have much equity in your home, you might not care as much about keeping it safe as your lender does. Because of this, before giving you a loan, your lender will want to make sure that your homeowner's insurance policy is up to date and in good standing.

If your mortgage company doesn't require you to have an escrow account, you should know that the cost of your homeowner's insurance won't be added to your monthly payment. Instead, you'll have to pay the premium on its own. You can pay for homeowner's insurance all at once or in monthly installments. However, it's important to remember that different insurers may offer different payment plans.

Does home insurance have to be paid as part of the closing costs?

Your lender will ask for full payment for the first year of your homeowner's insurance policy at the time of closing. As part of your closing costs, most lenders will take between 10% and 20% of your annual home insurance premium. After that, the money will be put into your escrow account and used for the next billing cycle. If you don't have an escrow account, you may have to pay the full amount of the first year's home insurance premium when you close on the property. Your lender may also charge you a small fee to get out of the escrow obligation.

Mortgage insurance vs. house insurance

If your down payment is less than 20% of the loan amount, most lenders will ask you to pay private mortgage insurance (PMI). PMI is a way to protect your lender, but it doesn't cover your property in any way, like homeowners insurance does. This is what makes the two kinds of insurance most different. PMI premiums can be anywhere from 1% to 3% of the total cost of your home, but you should plan to pay somewhere in that range. PMI, or private mortgage insurance, is an extra fee that is added to your monthly mortgage payment to protect the lender in case you don't pay back your loan.

A monthly mortgage statement that also shows how much the escrow payments are.

Home insurance and home warranties are two different things.

Your homeowner's insurance won't pay for damage that happens over time or because of a technical problem. This is exactly why you need a home warranty. It is meant to work with your homeowner's insurance in case there are problems with your home. For example, if your air conditioner stops working all of a sudden, a home warranty plan may pay to fix or replace it for you. Home warranties can be bought separately from your homeowner's insurance policy, and they cover almost everything in your home.

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