If you are financing a new home with a lender, most banks or other types of lenders will require you to have homeowners insurance in place before you close on your home. Homeowners insurance protects the lender’s interest in case something happens and you are unable to pay your mortgage note or if you suffer another type of loss, such as a natural disaster which destroys your home.
Homeowners insurance requirements
The minimum amount of homeowners insurance you’ll need is enough to cover the cost of your mortgage loan. Homeowners insurance comes with two different types of payouts; actual cash value and replacement cost coverage. If you purchase an actual cash value policy, the policy will only pay to repair or replace damaged items or your entire home if you suffer a total loss at the actual cost. Actual cost value is calculated by taking the replacement cost and subtracting the depreciation.
This may not be enough to rebuild your home to today’s standards. That is why many people opt for replacement cost coverage which in the event of a loss, will pay to replace or repair damaged items or rebuild your home if needed at today’s market value.
Elements of a homeowners policy
- Dwelling coverage: A homeowners policy provides coverage for the structure of your home, also known as dwelling coverage. This includes structural elements of the home such as the foundation, the roof, walls and any attached structures like an attached garage.
- Liability coverage: Liability coverage is a very important part of a homeowners insurance policy. It protects you against liability claims and medical costs if someone other than a resident of your home is injured while on your property. It will also help pay for the court costs of a liability lawsuit.
- Other structures coverage: Other structures coverage pays for damage to structures on your property that are not attached to your home, like a detached garage.
- Personal property coverage: Your homeowners insurance policy will pay for damage to your personal belongings or theft if your items are stolen. If you have valuable personal items, many policies allow you to purchase additional coverage, called an insurance rider, to cover expensive items like art collections or jewelry.
Your homeowners insurance starts paying for a claim you’ve made only after you’ve met the policy deductible. Your lender may require you to carry a certain deductible. Generally, the higher your deductible (the amount you have to pay out-of-pocket for damages), the lower your insurance premium. Choose your deductible wisely, keeping in mind this is the amount you’ll have to pay in the event of a claim.
Since you’ll have to have homeowners insurance in place before closing on your loan, it is a good idea to comparison shop to find the best deal well in advance of your home closing. Also, don’t forget at some point during the home buying process, you’ll need a home inspection. We offer professional home inspection services at reasonable prices. Visit our website to learn more!