When you buy a home, it's important that you protect it and yourself, primarily through insurance.
There are certain types of insurance that every homeowner needs, and then there are some types that only particular homeowners need. For example, flood insurance in South Carolina might be a good option, especially if you live near the coast, whereas in a midwestern state not in a floodplain, you can probably do without it.
If you're a new homeowner or are even thinking of buying a new home, the following are some of the important things to know.
When you buy a home, one of the initial steps of the process is getting a title. This is a legal concept that's confirmation you have ownership rights for the property from the person you're buying from.
Title insurance is supposed to protect both buyers of homes and mortgage lenders from financial losses or damages that are caused by a bad title. Most title insurance policies will cover the common claims against a title, like outstanding liens, back taxes, and wills that conflict with one another.
There are a lot of scenarios that can lead to a title problem, and you might find out after you purchase a home that there's a dispute regarding ownership, for example.
When you purchase title insurance, it's a way to protect against a range of risks like flawed public records, outright fraud, and outstanding encumbrances against the property.
You don't have to have a title policy as an owner, but it might make you feel better.
If you're getting a loan to buy a home, the lender will also require that you purchase a lender's title insurance policy.
Private Mortgage Insurance
Depending on your situation, when you buy a home, you might need private mortgage insurance. Also called PMI, this could be required if you're buying a home using a conventional loan. It's to protect the lender, and not you, but still, it's worth understanding it in case it's something you're required to pay.
Your lender arranges PMI, and then it's provided by a private insurance company. A lender will usually require you to have this coverage if you have a conventional loan and make less than a 20% down payment.
If you're refinancing using a conventional loan and you have less than 20% equity in your home, you might also be required to get PMI.
Homeowners' insurance policies will cover damage and destruction to the interior and exterior of a home, personal liability if others sustain harm on your property, and they can protect against the loss or theft of certain possessions.
There are three basic coverage levels.
Policy rates are primarily determined by how risky an insurer sees you as being.
More details about what homeowners' insurance covers include:
- If the interior or exterior of your home is damaged because of fire, lightning, vandalism, or other covered disasters, your insurer compensates you so you can repair your home or, if necessary, completely rebuild it. Destruction from earthquakes, a lack of home maintenance, and floods are usually not covered. You have to get separate riders for these. You might also have to get separate coverage for freestanding structures on your property, like sheds or garages.
- Clothing, appliances, furniture, and most of the other things contained in your home are covered if they're destroyed because of a disaster that's insured.
- Liability coverage is included in most homeowners' policies, and it protects you if someone files a lawsuit against you. If your pet was to hurt a neighbor, for example, your insurer would likely cover the medical expenses of the neighbor. If someone falls and gets hurt at your home and sues for damages, then your homeowners' policy should cover it.
- If you had to move out of your home because of repairs and damages, your policy might cover the cost of a house or hotel rental.
The types of homeowners' coverage are:
- Actual cash value, which covers the cost of your house plus the value of belongings after the deduction of depreciation. Depreciation refers to how much items are currently worth, as opposed to how much you paid for them.
- If you have a replacement value policy, it covers the actual cash value of your home and belongings without deduction for depreciation, which would allow you to rebuild or repair your home up to the original value.
- Guaranteed replacement cost or value is also known as extended replacement cost. This is considered the most comprehensive type of coverage, and it would pay for whatever it would cost to repair or rebuild your house, even if it goes beyond your policy limit. There are some insurers offering an extended replacement, but the ceiling is usually 20-25% above your limit.
When you buy a house, and you're shopping for insurance, it's extremely important that you understand what's not covered by your policy.
Flood insurance is a type of property insurance that some homeowners need to have. It covers specific types of water damage. Flood insurance would cover a heavy downpour leading to accumulation that's faster than what can drain, a storm surge from a hurricane, the overflow of a river or lake, or a mudflow.
Most other types of insurance specifically don't cover flood damage.
There are two general types of flood insurance.
One is building coverage which is similar to dwelling coverage on a homeowners' policy. This covers things like foundation walls, plumbing, and electrical systems, water heaters, and furnaces.
Then, there's contents coverage which is similar to personal property coverage on your homeowners' policy. This covers damages to belongings from flooding, like your curtains, artwork, furniture, electronics, and clothing.
These are the primary types of coverage that will be needed when you own a home. Having a home that you own is the biggest investment that you'll probably ever make in your life, so it's a good idea to talk to an insurance professional and make sure you're fully covered.