Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to firstname.lastname@example.org.
Question from Sammy in MA: Hi Brian, I’m thrilled that after eight months, I have an accepted offer on my first house. It’s been quite the adventure getting to this point. And I’ve come to realize this adventure isn’t over just because my offer has been accepted. My real estate agent is being a tremendous help by working to get the inspection and appraisal completed. I’m working through a checklist to prepare for closing. This is where my issue comes up. I’ve never had homeowners’ insurance before. I’ve never even had renter’s insurance. My agent gave me a few names to contact but I want to know more about what’s appropriate homeowner’s insurance for a first time buyer?
Answer: Hello Sammy. I get it. You’re under pressure to make a bunch of decisions as your closing day approaches. First, take a big breath and congratulate yourself for getting your offer accepted in today’s brutal market. Regarding homeowner’s insurance, it’s time to learn and decide about which features are right for you — it can be daunting as your closing approaches, and you see all those big dollar numbers being thrown around. Here are the most common things to be aware of…
It’s good that you are starting early. Your lender is certainly going to want proof of insurance on the day of closing. Typically, lenders want an insurance binder several days before the closing. So, your first step is to start shopping for it now. Sometimes, the insurance company wants specific information about the house. This can range from if it is on a flood plain to the brand of the wood-burning stove installed (the wood-burning stove happened to me). It’s always good to shop around for both the coverage you want and the insurance agency. At a minimum, have a lengthy talk with at least three insurers.
Sammy, you are going to have a lot of options to select from but let’s start with the basics. First, you should not need coverage for the full purchase price. The insurance that you are buying is for the house structure, the contents (your personal property), and liability coverage that includes some medical coverage. You probably also want some living expense coverage in the event you can’t live in your home for a while (additional living expenses coverage). But there is one thing that you should not need coverage for that is part of your purchase price. That is the land that your house is built on. Rarely (if ever) does the land need to be replaced. So, here are the main topics that you want to have a conversation with several different insurance agents:
As you have these conversations, ask detailed questions and read the fine print before signing a policy. An important part to understand is exactly how much the insurance will pay if your house is destroyed. Strongly consider “guaranteed replacement cost coverage.” Other versions have a dollar limit on what they will pay. If your policy is for $200,000 but the cost to rebuild is $250,000, you would have to personally pay the $50,000 difference if don’t have replacement cost coverage (inflation should be part of the decision).
Homeowner’s insurance protects against most common exposures like water damage, electrical fires, and roof leaks, but maintenance issues like mold and pest infestations usually aren’t covered. You also need special coverage for some natural disasters like flooding and earthquakes. Additionally, understand the limits of your content and personal property coverage. This is especially important if you have high-value property like fine art, a wine collection, antiques, etc.
Once you’ve figured out the level of coverage that you want and need (be sure you meet your lender’s minimum requirements), you’re probably ready to work on the cost of your coverage. Your deductible will have a significant effect on the policy cost. Keep in mind that homeowner insurance is for catastrophic losses. Don’t think of it as a maintenance policy that covers all your homeownership costs. Pick a high enough deductible. You want to be covered for a catastrophe, but a $1,000 repair bill isn’t a catastrophe. If you file a claim for everything over $1,000, your policy costs will quickly go up. For many average homeowners, it makes good financial sense to go with a deductible of around $2,500 and only file claims that are well above that amount. The pragmatic thing to do is have an emergency fund to cover lower cost issues and the emergency fund will cover the deductible for a catastrophe.
Sammy, before signing the policy you might want to also consider the less tangible qualities of the insurance company. This could be the customer service rating for how fast they resolve claims. It could also be the financial stability of the company (if your company were to go out of business, you would probably be switched to another company or managed by the state guaranty fund that could cap the amount of claims it will pay). Another consideration is taking out “umbrella insurance” if you still don’t think you have enough liability insurance. The last thing to do is commit to revisiting your insurance decisions every year or two to see if your needs have changed.
Here is a previous article about homeowner’s insurance that might also be of interest.
Please add your thoughts on first time buyer home insurance with a comment.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to email@example.com.
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