Learn How To Protect Your Mortgage With Homeowners Insurance

As with every large purchase, it’s important to establish an insurance policy. Homeowners insurance is no exception. In fact, you need to have a policy ordered before you can close on your new home. Shop for homeowners insurance as soon as you settle on a property to avoid any delays in the mortgage process. To help you insure your home, we’re covering all the basics. Learn:

• Why homeowners insurance is necessary
• What it does/does not cover
• How much it costs
• How to pay for your policy

Why Is Homeowners Insurance Necessary?

Before you close, your loan officer will ask for your home insurance policy information. We require this step to protect your mortgage in the event of a worst-case scenario (i.e., natural disaster or fire). A homeowners insurance policy will make it possible to recover and continue to repay the mortgage.

What Does Homeowners Insurance Cover?

Homeowners insurance is not flood insurance, mortgage insurance, or title insurance. Those are separate policies that you may or may not need.

Homeowners insurance covers four major areas:

• Damage to the residence
• Additional Living Expenses (ALE)
• Liability
• Personal Property

Damage to the Residence

The insurance covers damage to the residence and attached structures, such as your garage. It also covers unattached structures within limits. Unattached structural coverage cannot exceed 10 percent of the property’s total insurance.

You don’t normally have to purchase replacement value insurance, but you might want to anyway. If your home is totaled in a wildfire, for instance, it might cost more to rebuild than you’d receive if you purchase the minimum required by your mortgage lender.

If you can’t easily cover the additional cost, it makes sense to purchase replacement value insurance even though it’s more expensive.

Additional Living Expenses (ALE)

Additional living expenses (ALE) coverage reimburses you for living expenses if your home becomes unlivable for any covered reason.

ALE applies while you have your home rebuilt or repaired. ALE may be limited by dollar amount or number of days, so check your coverage before checking into the Ritz. If you rent out part of your home, ALE also reimburses you for uncollectible rent due to the home being unlivable.

Personal liability

Your homeowners insurance also protects you from lawsuits arising from damage or injuries to others that may occur on your property. This includes no-fault medical payments to anyone (excluding you, your family, and your pets) injured in your home. The injured party can simply submit medical bills to your insurance company.

Personal liability coverage also pays for damage to others’ property caused by your pets or children. If your dog digs up your neighbor’s fancy garden, you’re covered. If Rex destroys your yard, though, you have to eat that cost yourself. Your insurer also defends you in court and pays out any damages awarded up to the limit stated in your policy documents.

Liability limits range from a low of about $100,000 but can go much higher. If you have substantial assets, or you are a target (a well-known public person), consider an “umbrella” (excess liability) policy. It’s relatively cheap and kicks in only after your homeowners insurance liability benefit is exhausted.

Personal property

Your policy covers destroyed or stolen personal property, usually up to 50 to 70 percent of the amount of your residential coverage. Personal property coverage applies even to property taken off your premises, but there may be limits (typically to 10 percent of your personal property coverage).

You normally also get $500 of coverage for unauthorized use of your credit cards and $500 per landscaping item such as trees and shrubs (if destroyed or stolen, not if you are just a terrible gardener and kill them by mistake).

If you have expensive luxury items such as art or jewelry, you may need a special personal property endorsement or “floater” to insure the item for its officially appraised value.

What’s NOT Covered?

Homeowners policies cover damage from many common hazards — but not all. Flood and earthquake damage are excluded from standard policies. That’s not all; check your policy for specifics. Look for additional exclusions for property neglect, intentional loss, landslides and mudslides, general power failure, and even damage caused by war.

One other exclusion that can be costly is the “Ordinance or Law” exclusion. Building codes that drive up the cost of rebuilding or repairing may not be covered by your insurance policy. If current building codes require more expensive materials than the originals, new materials may not be covered for the full price. That’s another case for buying full replacement coverage.

How Much Does Homeowners Insurance Cost?

According to the Insurance Information Institute, the national average premium for homeowners insurance coverage is $1,211. Average rates vary by state and range between $692 (Utah) and $1,968 (Louisiana).

Regions plagued by hurricanes, wildfires, and tornadoes tend to have higher insurance costs. But local factors matter, too. Neighborhood crime rates affect what you pay for hazard insurance. But being to a police station tends to lower your rates.

You likely pay a different rate than your next-door neighbor, even if your home is identical. If the previous homeowner filed one or more homeowners insurance claims in the previous five years (ask your real estate agent for this information), you may end up with higher premiums because of the Comprehensive Loss Underwriting Exchange (CLUE) system, a database of claims. Insurers use it to calculate insurance claims you’ve made in the past five to seven years.

These five factors also impact your homeowners insurance premiums:

• Age of buildings: In general, newer homes cost less to insure than older ones.
• Construction type: Brick homes are cheaper to insure than wood-framed homes.
• Services: The closer your property is to a fire station, the lower your policy costs.
• Extras: Replacement value coverage and floaters for personal property increase your premiums.
• Deductible: Increasing your deductible reduces your annual premium.

5 Factors that Impact Homeowners Insurance Premiums

These five factors also impact your homeowners insurance premiums:

• Age of buildings: In general, newer homes cost less to insure than older ones.
• Construction type: Brick homes are cheaper to insure than wood-framed homes.
• Services: The closer your property is to a fire station, the lower your policy costs.
• Extras: Replacement value coverage and floaters for personal property increase your premiums.
• Deductible: Increasing your deductible reduces your annual premium.

Deductibles typically range between $250 and $1,000, although some insurers offer additional choices.

It makes sense to explore multi-policy discounts. If you insure your automobile and home with the same insurer, you might get a discount on both policies. However, some studies have found that shopping for the lowest-cost options for each policy can get you a better deal than going with a single provider.

To secure the best homeowners insurance rate, your best strategy is to shop with multiple providers and compare bundled offers to individual policies.

How Do You Pay Homeowners Insurance Premiums?

You pay your first year’s insurance premium when you close on your home loan. After closing, we will set up your escrow account. When your loan officer refers to your PITI payment, that’s what they’re referring to principal, interest, taxes, and insurance.

With an escrow account, 1/12 of your annual premium will be added to your monthly mortgage payment, and your mortgage servicer will pay the premium on your behalf when it comes due the following year. Your property taxes will also get this treatment — 1/12 of your annual cost is added to your mortgage payment, and your mortgage servicer pays the taxes for you when they are due.

Each year, your mortgage servicer will analyze your escrow account and may adjust your monthly payment or refund excess payments.

As always, we’re here to help. If you have any questions regarding a home purchase or mortgage, give us a call or start your application online today.