This article shares the 10 tips you need to know about your homeowner’s insurance.
But, your homeowner’s insurance policy is like trying to learn a foreign language. Or better yet, reading your policy jacket is like watching paint dry. I mean, who watches paint dry?
Whatever the case, owning a piece of Americana is what every American citizen dreams of doing! Having a little place to call your own, sharing stories with loved ones, and raising a family is what it’s all about.
Protecting your investment should be at the top of the list. We’re going to streamline your understanding, share tips and answer questions when it comes to your homeowner’s insurance policy.
Table of Contents
- Understanding Your Homeowner’s Policy
- Breaking Down the Basics
- Tips For Maximizing Your Homeowner’s Insurance
- Tips on Buying a Home
- Homeowner’s Insurance – Frequently Asked Questions
Buying your first home can be exciting, challenging, and stressful – all at the same time. Which can cause heavy caffeine consumption and, my personal favorite, chocolate!
The conversation may go something like this. You look at your beloved and say, “Hey honey, let’s buy a house and raise a family.” To which the reply is, “okay, let’s do it!” Alright, maybe not in those exact words, but you know what I mean.
“Sleep is for people without access to the MLS…”Lighter Side of Real Estate
Buying a home is pretty involved; check out the tips for buying a home a little further down.
You meet with a real estate agent and start shopping for your slice of heaven (the fun part). Then, after finding the home of your dreams, the agent makes an offer on your behalf while you stand by patiently waiting to hear five beautiful words, “the seller accepted your offer!”
Whew! Well alright! What’s next? Financing.
A mortgage specialist calls and lays out the plan for the next few weeks. Then they ask for a ton of paperwork (stored somewhere) and casually mention you’ll need homeowner’s insurance to protect your investment and the bank’s interest. Unless, of course, you buy your home outright, all cash, more on that later.
The challenge is on.
You knock the dust off boxes stored in the attic and uncover paperwork that hasn’t seen the light of day since… well, dare I say it… yea… no, moving on.
It’s all good. The train is on track.
As closing day approaches, the lender calls and says, “Hey, I need your quotes for homeowner’s insurance.” Screeetch, ah, snap! I forgot to get homeowners’ quotes! Undaunted, you jump on the computer, pull up your favorite Internet browser (the 800-pound Google’rilla), and type “homeowners insurance near me” into the search bar. Yea .. that should do it .. 1,240,000 results! Wut… more coffee, please.
After a mutually engaging conversation with the agent and providing them with all the necessary details, you’re surprised to discover the premium is very reasonable.
The homeowner’s insurance deductible is fair, and property coverage is enough to cover a total loss. And liability limits are in place to protect the family.
Sold! We’ll take it. The agent tells you the declaration page is emailed/faxed to your mortgage/bank and the policy mailed.
To all those that thought English was the primary language, wait until your homeowner’s insurance policy arrives in the mail! Deductibles? Declaration pages? Property coverage, liability?? What the freak! Argh, more chocolate!
Understanding Your Homeowner’s Policy
Legalese aside, your homeowner’s insurance policy is pretty straightforward, once you cut through all the addendum’s and riders. At its core, the policy is a contract between an insurance company and the insured.
The insured can cancel the contract at any time, for no reason. But the insurance company cannot without just cause.
The most important parts of a policy refer to property coverage and liability. Your lending institution requires homeowner’s insurance because of their financial interest in the property, i.e., the money they loaned you to buy the house. So unless you buy the house outright, the bank owns it until you pay off the loan, either 15 to 30 years down the road.
Breaking Down the Basics
This is the amount you pay per incident and the insurance company pays the rest up to the limits of the policy. As an example, say the limit of your homeowner’s insurance policy is $300,000 and $5,000 for the deductible.
The house catches on fire, resulting in $100,000 in damages. Your portion of the bill is the deductible ($5,000) and the insurance makes up the rest ($95,000).
Speaking of Limits – this is the maximum amount an insurer will pay on any single incident.
It makes sense to max out the limits, so there’s no gap should a total loss occur. Any gap becomes your responsibility. Apart from your replacement/dwelling coverage, the items outlined below are typically a percentage of the dwelling coverage, generally known in the industry as Coverage A.
This can include detached garages, pools, sheds, barns. Basically, any structure on your property not attached to your home.
This includes the contents in your home, such as furniture, jewelry, appliances, clothing, and collections.
Loss of Use
Continuing our fire example, if the home becomes uninhabitable due to extensive damage, loss of use pays for reasonable living expenses when you have to live someplace else, a hotel for instance, while rebuilding/repairing your home.
This coverage protects you and your family from legal entanglements due to neglect. For example, you invite friends and family over for a barbecue, and a guest injures themselves during the festivities. They fall and hurt themselves from a broken step and decide to sue you because of your neglect.
They can collect for damages, such as hospital bills, pain and suffering, loss of income, and attorney’s fees up to the policy limits. Not having enough liability coverage can result in the loss of your home to pay for damages.
Medical Payments to Others
It covers medical bills incurred by people invited on your property or as a result of your activities and can help offset the cost of the medical bill.
The last two coverages, Personal Liability and Medical Payments to Others are stand-alone but still a part of your policy. Very important to understand that not all losses are covered under the homeowner’s policy, like floods and earthquakes.
If your dream home resides in a flood or earthquake zone, your lending institution will require the purchase of a flood or earthquake insurance policy to protect the home. Talk with one of our knowledgeable agents, they’ll be more than happy to help you understand your options.
Tips For Maximizing Your Homeowner’s Insurance
Increase Your Homeowner’s Insurance Deductible
Deductibles are the amount of money you have to pay toward a loss before the insurance company starts to pay a claim, according to the terms of your policy. The higher your deductible, the more money you can save on your premiums.
Bundle and Save
Bundling your homeowners with the same insurance company can save 5 to 15 percent on premiums. Bundling home and auto is a perfect example.
Don’t Confuse Market Price with Replacement Cost
Market values and rebuilding costs are two separate things. Where market values are established by area home sales, the cost of labor and material fluctuates year to year. Think of it as buying gas for your car. We don’t expect to pay the same price at the pump, it would be nice, but prices fluctuate and are directly tied to market forces i.e., supply and demand.
Most insurance companies offer additional discounts when you protect against vandalism and burglary. Installing a burglar alarm can help protect your valuables and save money on your homeowner’s insurance.
Ask About Other Discounts
There are several discounts offered by insurance companies that help offset the premiums you pay. Discounts like multi-policy, claim-free, early signing, protective device, welcome and loyalty, new home buyer, 55 and retired are all available to offset the premiums you pay. Ask about them on your call with us.
Maintaining a Good Credit File
Having good credit shows an insurance company you are financially responsible, and it can profoundly affect insurance premiums.
Review Your Homeowner’s Insurance Policy and Value Possessions Once a Year
Just as you would review financial statements from banks and retirement, your insurance policies should be reviewed at least once a year. New purchases of jewelry, additions to art collections, coin and stamp collections, expanding the home with a new addition should be reported as soon as possible.
Tell your agent as soon as possible so these items can be added to your policy, protecting them against loss. There is nothing worse than investing in a piece of jewelry or art, experiencing a loss, and not getting a full replacement because the items were not added to the policy.
BONUS TIP: Take photos of your possessions and upload them to a cloud service like Google Drive or Dropbox. That way, in the event of a loss, you can access it from a mobile device and not have to scramble trying to remember what you had where or what was lost.
Here at the Lovelace Insurance Agency, we take pride in reviewing your coverages once a year and offering solutions that can help lower your premiums.
When Buying a Home Consider the Cost of Insurance
Getting an insurance quote prior to starting the home buying process can help you understand the costs associated with homeownership. And as a plus, it makes the home buying process easier for all parties involved.
There are several things you can do during the home buying process that will help when getting insurance rates and can go a long way in lowering insurance rates before putting an offer on the table. Here are some questions to consider:
- When was the home built (age)?
- How old are the plumbing and electrical systems?
- What’s the square footage?
- How many claims have been filed over the past 5 years?
- Where is the home located?
Consider Increasing Homeowner’s Insurance Liability to $300,000
Remember, liability is something you’re responsible for but neglected to prevent, which can cause a lawsuit in case of damages. Consider raising this limit from $100,000 to $300,000. Purchasing an umbrella policy can add an extra layer of protection, helping protect your investments when tragedy strikes.
BONUS TIP! Get a C.L.U.E.: Short for Comprehensive Loss Underwriting Exchange, a C.L.U.E. report discloses up to seven years of personal-auto and personal-property claims history. If you are buying a home it is a good idea to ask the current homeowner to request a copy of the C.L.U.E. loss history report.
Tips on Buying a Home
The tips listed below are by no means meant to be exhaustive, but they cover the basics of buying your first home, or second, third. You get the point.
Get Your Finances in Order
The most significant financial investment you will ever make in your life will be purchasing a home. But before you start the process, check out these tips…
Save for a Down Payment
Ideally, save at least 20% of the purchase price. Simple math would say if the homes you’re targeting in an area range between $150,000 to $200,000, average them out and target 20%, or roughly $35,000. If the down payment isn’t possible there are other options.
Check Your Credit Reports
A great place to start is at AnnualCreditReport.com. If you find errors or unpaid collections, it’s better to dispute or settle them before starting the home buying process. Then start monitoring your credit profile with services like CreditKarma.com or CreditSesame.com.
Pay Down Debt-to-Income Ratio
Often referred to as D.T.I. by mortgage professionals, the debt-to-income ratio is used to assess how much risk is involved as a borrower. D.T.I. is the measuring stick by which all lenders decide whether enough money is available to cover future mortgage obligations.
Gather Your Paperwork
Remember those dusty boxes in the attic? There is a lot of paperwork when applying for a mortgage. Your lender may even ask you to send the same paperwork again (chocolate? Ooosah).
You’ll want to have copies of these documents ready at a moment’s notice:
- Two current pay stubs.
- Two to three months of recent bank statements.
- Last two years of tax returns
The mortgage process is pretty lengthy. It usually revolves around these steps. First, the lender combs through all your financial documentation. Second, there’s a credit check. And third, if all goes well, you’ll get conditional approval to buy a home up to a specific price at an introductory interest rate. Don’t forget to look at non-bank lenders and credit unions. Lenders like Rocket Mortgage and Quicken Loans are great alternatives to big banks.
90% Mortgage Rule
Chances are good the mortgage company pre-approves for a higher home purchase price. And it’s up to you to think through what that translates to as a reasonable monthly payment. Don’t forget to add to that figure your taxes and insurance, along with possible repairs and maintenance you wouldn’t have to pay if you were renting an apartment or house. When it comes to a mortgage, figure on stepping back 10% from what your lender says you qualify for.
Get Multiple Quotes Within 14 Days to Limit Credit Inquiries
Your credit file gets a hit each time lenders pull credit. But, you can minimize the damage by getting all quotes within 14 days. That way, it doesn’t appear like you’re applying for multiple loans from multiple lenders.
Don’t Make Major Purchases Once Pre-Approved
After the approval letter generates, do not apply for any new credit within six months of when you expect to buy your home. The reason is any new inquiries for credit will show up on your credit report and the mortgage company will run additional credit reports prior to your closing date.
Start Shopping for Homes Online
The process of learning how to buy a house is much different today than in the past. The Internet has made this process easy, and online access to information about homes, neighborhoods, and more is available and faster to access. Enjoy these tips on the home buying experience.
Download the Right Apps
Redfin and Zillow both let you look as if you’re riding around a neighborhood and exploring homes for sale based on your location. You can get so much information — from square footage, bedrooms, bathrooms, the age of the home, and price per square foot — right from your mobile phone.
Hundred House Rule
The basic strategy here involves looking at a minimum of 100 homes, either in person (get some good walking shoes, just say’n) or online, to get a sense of the real estate market and what’s available in inventory. You can speed up this process considerably with online access, shoes optional.
Concentrate on Identifying Zones
It’s all about being thorough and not focusing on one house. It’s more about identifying zones – streets, neighborhoods, and areas where you’d like to live — and then deciding on 10 to 20 houses to target.
Finding the Right Real Estate Agent
Now the fun begins. The next step is hiring a buyer’s agent. This person should help keep emotion out of the buying process and share their experience throughout the buying process.
Negotiate the Sales Price
When it comes to negotiating the price, your agent should be in complete control and relay the information between both parties. If you did your homework on real estates agents in your area, this individual should be very knowledgeable in contract negotiations.
Explore Neighborhood Comps as a Starting Base for Your Offer
Your agent has access to “comps.” It’s the recent sale prices of similar homes in the neighborhoods you’re targeting. The tax assessor’s office will also have this information. And there are websites like Redfin and Zillow that make it very easy to get this information.
Submit Your Offer
Your realtor should know the area when submitting the offer, ensuring you’re not paying too much for the house you want. Another consideration is how long a home has been on the market. The longer the home is listed, the more likely you can come in with an aggressive offer.
Keep in mind a seller is not hungry in the first 45 days after their home is up for sale. After that, market forces begin to wear them down. They get impatient and tired of the uncertainty, especially when they are committed to buying another house.
Closing Costs and Points
These are fees paid to the lender and title company for facilitating the purchase. And depending on the location, they typically average around 3% of the purchase price but can be as high as 5%.
There are always hiccups in any transaction involving contracts. So now is the time to deal with any contingencies, such as inspections and appraisals. Your primary goal should be to make sure the home you purchase is sound and that you are not paying more than the market dictates.
Hire an Inspector
Don’t buy a home without first inspecting it! Unless it’s a new build. Even then, having the home inspected after it’s built is an excellent idea. No builder is perfect. Mistakes made by subcontractors, whether cosmetic or structural, are possible, and a reputable inspector will strive to find potentially expensive repairs and flaws in new construction. You want an inspector that is going to be unbiased, tell you what you need to know, and not what you want to hear, as in … ya, looks great!
Securing an assessment of a property you’re about to buy is the best way to protect you from paying too much. With an appraisal, you can get a realistic sense of the property’s value when compared to other similar properties in your target area. Once you find the home you want to make an offer on, the appraisal should be ordered and reviewed.
Arrange for Home Insurance
Here’s where an insurance agency steps in, and it’s an essential step in the process. Prepaying a year of home insurance before you can close on your mortgage is standard practice. If the loan allows you to escrow taxes and insurance, it will be handled at the closing.
Research Quality Companies
When buying a home insurance policy, a good rule of thumb is to research an insurance company’s reputation by both customer complaints and customer satisfaction ratings.
Take a High Deductible
When you’re buying a home insurance policy, you want to be sure to take the highest deductible you can handle and that your mortgage holder will allow. Doing this will lower your premium and discourage unnecessary small claims that can potentially lose discounts and increase premiums.
Reputation Over Low Premiums
It isn’t just about getting the lowest premium. You want to make sure the insurance agency you decide to partner with will be there to guide you through the process to make you whole when there’s a big problem. Customer service and satisfaction are key.
Close the Deal
Getting excited yet? You’re inches away from getting the keys to your new home! Here are some things to keep in mind before the big day.
As your closing day approaches, you’ll get the final numbers showing how much money is needed for the downpayment and incidentals. Review these numbers carefully and ask questions about unfamiliar terms.
The Day of Closing
Yay! The big day finally arrives, and now it’s time to meet the closing attorney at the title company, their office, or maybe even the lender’s office. Be prepared to sign lots of papers. Be patient, it’s only a matter of time before the keys to your new home are securely in your hands. Imagine how good that will feel, chocolate optional!
Homeowner’s Insurance – Frequently Asked Questions
Is homeowner’s insurance tax deductible?
Homeowner’s insurance is typically not tax-deductible. Other deductions can be claimed if you keep track of your expenses and itemize your yearly taxes.
Is homeowner’s insurance required?
Unlike car insurance, which is required by law, homeowners insurance is not. However, (and this is huge) mortgage lenders will require some basic form of homeowner’s insurance protecting their financial interest in the property.
Is homeowner’s insurance the same as hazard insurance?
Hazard insurance is part of a homeowner’s insurance policy – it is not a separate coverage type.
How homeowner’s insurance is calculated?
Suppose an insurer wants to set its premium for a group of homeowners. In that case, it first divides the losses associated with that group by its exposure (the amount of property value insured) to that group.
Is homeowner’s insurance included in the mortgage?
The short answer is no. An insurance policy is separate from your mortgage loan agreement. Your mortgage lender may be able to set up an escrow account to pay your homeowner’s insurance and property taxes.
Is homeowner’s insurance paid in advance?
Yes. Your homeowner’s insurance payment will typically fall into the prepaid costs category of your closing costs. Prepaid items are not directly related to purchasing the home but are usually a requirement of the group funding the loan.
Will homeowner’s insurance cover water damage?
Great question! If the damage to your home is sudden and accidental, your homeowner’s insurance may provide coverage. A standard homeowner’s insurance probably won’t cover water backup from an outside sewer or drain.
You may be able to add optional coverage to your policy, such as water backup. In addition, you can find small, independent insurance policies that cover outdoor plumbing applications. Doing an Internet search will uncover several companies that cover these items
How much homeowner’s insurance does a lender require?
Lenders only require you to maintain coverage for their portion of the mortgage and not your own. However, covering 100% of the value of your home is an intelligent thing to do. Nobody wants half a house, just say’n.
Do I need homeowner’s insurance if my house is paid for?
When you pay off a mortgage, the requirement to have homeowner’s insurance likely goes away. Still, this does not mean you should cancel your policy. Remember, your home is an investment. Therefore, protecting your interest is always at the top of the list.
Will homeowner’s insurance cover dead tree removal?
Homeowner’s insurance typically does not cover the removal of the trees unless it falls on a fence, garage, or home and causes damage. There are times when a policy will pay for removing a tree if it falls and blocks your driveway. Best to talk with an agent, give us a call.
Will homeowner’s insurance cover black mold?
Homeowner’s insurance covers mold damage if a “covered peril” caused it, as in fire or explosion. Otherwise, an insurance company will likely not cover mold damage. An example would be a water leak in a wall that’s been happening over time. The question to ask is, “was it sudden and accidental?” If it’s black mold, it’s been happening for a while and it’s up to the insurance company on whether they will cover the damage.
How does homeowner’s insurance claims work?
First, before filing a claim, make sure it’s in your best interest. Life or death situations, emergencies, i.e., storm damage or fire, one should absolutely call and file with your insurance company after everyone is safe and the situation is under control. For non-emergency, non-life threatening events like water leaks, call your agent first (not the insurance company) before filing a claim and get the facts.
Once a claim is filed, in most instances, an adjuster will inspect the damage to your home and offer a certain sum of money for repairs, based on the terms and limits of your homeowner’s policy.
“Calling the insurance carrier, and not your agency, obligates them to file the claim, regardless of whether it’s paid or not. This often results in losing discounts, which in turn raises premiums and the homeowner is still faced with having to fix whatever caused the loss. That’s a lose-lose for the homeowner. A win-win is calling your agent first and discussing the options!”The Lovelace Insurance Agency
At our agency, we think buying homeowner’s insurance should be easy, transparent, and most importantly affordable. Give us a call at 901-853-5442 and let us quote your insurance needs and experience what we have to offer.
You don’t know until you know. And chocolate .. is a beautiful thing .. just say’n.