When shopping for a home for the first time, you will likely pay attention to the purchase price, but there are other costs to keep in mind. There's one expense you might have not even heard about yet: homeowner's insurance.
Homeowner's insurance is different from private mortgage insurance. While private mortgage insurance is an added cost to your mortgage to protect the lender in case you default on your loan, homeowner's insurance is intended to insure your home in case of damage or other adverse events.
According to the Consumer Financial Protection Bureau, homeowner's insurance is typically required by the lender because the financial institution wants to know that their investment is guarded against destruction.
Here are key points to consider when shopping for homeowner's insurance:
Who Pays for Home Insurance
Either your lender can purchase a homeowner's insurance policy for you, the cost of which could be part of your monthly mortgage payment, or you could purchase coverage yourself independent of the lender. If the lender buys coverage for you, the CFPB said you will pay for the insurance in installments and the money will be deposited into an escrow account. The lender will use the escrow account to pay for the insurance when it is due.
What is Covered Under Insurance Policies
Imagine if your home is damaged by an electrical fire. Do you know if your home and its contents would be covered under your insurance policy? Be sure to ask an insurance agent what is specifically covered in your homeowner's insurance policy.
Here are examples of expenses or losses covered under home insurance:
- Detached structure damage. Consider whether you have items outside the home that also need protection. According to insurance company Travelers, many homeowner's insurance policies may cover structures that are away from the home, such as a detached garage or shed.
- Home repairs. When there is some kind of damage to parts of your home, your homeowner's insurance may help pay for the cost of fixing them. Travelers noted that if your home was affected by a covered cause of loss, you could reduce the repair costs, including for your plumbing or electrical wiring.
- Injuries on property. The Insurance Information Institute highlighted the importance of homeowner's insurance in protecting you and your family members against legal liabilities, such as injuries that occur on your property. You might be responsible for paying someone else's medical costs if they hurt themselves on your land. Additionally, a homeowner's insurance policy could cover the costs of a lawsuit if there are injuries and property damage stemming from an accident on your property.
- Personal items. If a cause of loss not covered by insurance happens, you risk losing your personal items like furniture, clothing and more without compensation. Your homeowner's insurance policy will provide coverage for this property so you can make new purchases, according to Allstate.
- Living expenses. If you had to move out of your home because of an accident, your policy might cover expenses related to not having use of your home, according to Travelers. Loss of use coverage will allow you to spend money on your housing and living expenses in the event you are displaced.
- Destruction by household pets. The III said your homeowner's insurance might also cover damage from household pets, such as if a pet causes injuries or property damage to other people.
What is Not Covered
Although your homeowner's insurance policy will cover both property damage and legal liabilities, many do not cover natural disasters.
Examples of natural or weather disasters not usually covered, according to Allstate:
Other situations that may not be covered include if your home is destroyed in a fire or if your home has been vandalized or robbed. Although standard home insurance policies do not cover major natural disasters, there are ways to extend coverage to include these. For example, you could purchase two separate policies to protect your home from the costs of fires and floods.
To shop around for your best homeowner's insurance rates, consider these tips:
Use Your Existing Insurance Company
Before purchasing a house, you might have already worked with an insurance company for a car, motorcycle or other type of property. If you already have an existing insurance company, you might want to contact a customer representative and ask about adding a home insurance policy to your plan. Not only do many insurance companies provide bundles for home, auto and other property, making it easier for you to choose, you could save money through provider discounts.
Look at Factors that Determine Cost
You have control over how you choose and manage your homeowner's insurance policy. Not only do you have to consider how much coverage you want to have, but also the value of your current possessions. If your house and other belongings have high-value, you might want to purchase a policy that reflects these expenses in case you have to repair or replace them.