What Types of Home Owner Insurance Do Home Buyers Need?
Buying a home is a biggest single purchase most people will ever make and it makes
sense to insure the home to protect that valuable investment. The question of what
type of home owner insurance is needed is one of the most frequently asked by first
time home buyers, and both the home buyer and the lender will want to make sure
the home is properly insured.
One of the most important insurance considerations for a home purchase
is that of title insurance. Title insurance is generally used to protect
the lender, and the lender typically will not release the funds to close
on the home until the title insurance is in place. In most cases, the
buyer of the home will be required to pay for the lender's title
It is important for the buyer to understand, however, that the title
insurance they pay for protects only the lender, not the buyer. It is
important therefore for the buyer to get his or her own policy. It is
usually possible to negotiate who pays for that insurance. The title
insurance used to protect the buyer's interests is a one time expense,
and the policy is not transferable.
The price of title insurance with vary along with the purchase price of
the home; the higher the price of the property the higher the cost of
the title insurance will be. In cases where the seller has purchased or
refinanced the property within the last few years, it may be possible to
qualify for a discounted rate on the title insurance. This is known as a
short rate in the real estate industry.
The lender will also want to see that a hazard insurance policy is in
place before releasing the funds for the home. This type of insurance,
often referred to as homeowners' insurance, protects the property
against such things as storm damage, water damage, liability issues,
vandalism, and theft and damage to the personal property contained in
the home. It is important to note, however, that homeowners' insurance
policies do not cover flood damage; such home insurance coverage must be purchased
separately if flooding is a concern.
Unlike title insurance, which is a one time expense, hazard insurance is
a recurring expense, and the premiums must be paid on an ongoing basis.
In most cases the lender will require the payment of one year's premium
at the closing, so it is important to take this cost into account when
determining your home buying budget. After the first year's premium is
paid, the homeowner and the insurance company will work out a payment
schedule for ongoing payments.
The cost of home owners insurance will vary from place to place and from
one home owner insurance company to the next. The home insurance rates in each location
will vary according to the building costs in the area, any localized weather issues, and a
number of other factors. There are also various kinds of home owner insurance coverage, and
it is important to understand the difference between those types of
coverage as you shop.
Obviously, the very best type of home owner insurance coverage is a
policy that guarantees to pay the full replacement cost of the home.
This means that the policy will pay what it costs to rebuild your home,
even if that cost exceeds the limit of the policy. While this type of
policy was once common, it is becoming more difficult to find, and many
companies are beginning to limit coverage to the limit of the policy.
Others are more generous, offering to pay up to 125% of the policy limit
to replace a home that has been totaled.
Since most home owner insurance agents will provide a quote based on their estimate
of rebuilding costs, it is important for the homeowner to know the
square footage of the home. That information should appear on the
appraisal report which was prepared when the loan paperwork was
prepared. It is important to obtain a copy of the appraisal, since you
will need it when you shop for a homeowners' policy. In addition to the
estimated rebuilding costs, the home insurance agent will need to know the
condition of the home, as well as any recent upgrades that have been
Typically, the home insurance agent will arrive at the rebuilding cost by
multiplying the square footage of the home by the cost per square foot
to build in your area. Some insurance agents will provide a low cost to
rebuild in order to save their policyholders money, but that could mean
that the policy would not be adequate to cover the true cost of
rebuilding the home if disaster strikes. Therefore, it is a good idea to
double check with local contractors for the rebuilding cost estimate to
make sure that the estimate used is adequate.