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 [email protected].
Question from Tammy in TN: Hey Brian, I really did it. I made an offer on my first home and it has been accepted. I couldn’t be any more excited that it will close in three weeks. But I still have a lot to do before then. Besides reviewing the closing paperwork, shutting off and opening new utility accounts, having a garage sale, and packing to move, I need homeowner’s insurance before the closing date. I have renter’s insurance but insuring my $240,000 home has me thinking that I need more information about what I need now. I know a few things about theft insurance from my renter’s policy and I think I have some liability insurance also. But I seriously don’t understand how any of this works or what I need to be insured for as a homeowner. Please help.
Answer: Hello Tammy. This could be a surprise to you but you might not have to insure your new home for the full purchase price. Something to keep in mind about homeowner’s insurance is that you are only insuring your home. Not the ground that it is built on. For that reason, Consumer Reports recommends you seek replacement cost coverage. That ensures that you'll have enough to rebuild, regardless of what it costs. Make sure the policy includes an inflation clause so that your coverage rises as local home-building costs rise.
However, most people buy homeowner’s insurance for more than just the replacement cost of the house. According to UtilitySavingExpert.Com, if you want homeowners insurance to cover both damage to your home and its contents. But most homeowners typically buy insurance that reimburses for losses due to theft and pays out if guests on the property are injured (liability insurance). Your policy may also pay for living expenses, such as a hotel if your home becomes uninhabitable.
You have many choices about what you can buy insurance for. Of course, the more you insure, the higher your premiums will be. The choices you make now are going to affect your mortgage payment for years to come because your homeowner’s premium will be wrapped into your mortgage payment. Your mortgage company will require a minimum amount of insurance but you probably want more. You should start by talking to your mortgage representative. At a minimum, most lenders require that the home be insured for 100% of its replacement cost so that the home is rebuilt from the ground up in the event of a disaster. This can vary, so ask about the replacement cost versus the mortgage amount, and remember you don’t need insurance for the land. Many mortgage companies also require liability coverage in the neighborhood of $100,000. But Tammy, you might want more for your peace of mind so ask insurance agents about the cost for liability insurance in the $300,000 to $500,000 range.
As I already mentioned, you have a lot of choices when it comes to homeowner’s insurance. I haven’t specifically researched Tennessee but most states have a few standard levels of home insurance called forms. The HO-3 is the most common that homeowners go with. It covers all perils that might harm your home except for those that are specifically excluded. It will also reimburse you for the loss of specifically named possessions and offers personal liability coverage if a visitor sues you for being harmed on your property.
HO-5 is also common but is more expensive than HO-3. The main difference is that it covers all personal property except for those items that are specifically excluded.
Tammy, you also want to think about the perils that are common to your area. For instance, I’m in Washington where earthquakes are a little too common and many homeowners have extra insurance for this because standard policies don’t cover earthquakes. You need to give this some serious thought, talk to people that already have homeowners insurance, and with a few different insurance agents. More than one person has been unpleasantly surprised to learn that something they thought was cover was not when they made a claim. For instance, many hurricane policies cover wind damage but not the flooding that often happens close to coastlines. Flood insurance can also be tricky. A standard policy typically pays for flooding that happens inside the home but not from outside causes. For instance, if a water pipe in the house ruptures, it would be covered but chances are that a ruptured lawn sprinkler system that causes interior damage would not be covered. If you live in a flood plain with naturally occurring floods, the mortgage company will probably require special flood insurance. There are other perils that you may want to consider such as tornadoes.
Something else to talk with insurance agents about are the three basic levels of coverage: 1. actual cash value, 2. replacement cost, and 3. extended replacement cost/value. While the replacement cost of the house itself probably has an inflation clause, personal belongings usually don’t unless you purchase extra protection. Otherwise, your personal property will be reimbursed based on depreciation. You won’t be reimbursed for the replacement cost of a 5-year-old TV. Instead, you’ll be paid the depreciated price it is worth if it is destroyed or damaged.
Tammy, because this is your first time shopping for homeowner’s insurance, talk to several agents and ask every question that you can think of. Also, talk to family and friends that you think have some insights about the needs where you live. When you are close to deciding on a particular policy, read the fine print and have anything you don’t understand explained to you.
What can you add for first-time homeowner insurance shoppers? Please 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 protected].