Congratulations on being under contract on a new home - or Hooray! you are on the path to homeownership. If you’re thinking of becoming a homeowner, you’ve likely spent time budgeting for additional expenses – property taxes, lawn care, new furniture to fill up that extra space…you get the idea. But have you factored in protection for your new home?
While you’re crunching numbers, remember to include homeowners insurance. I have never seen a mortgage company that did not require you to have homeowners insurance for your new mortgaged home. They want to know that if anything happens to your new home, the insurance will kick in and you will be able to pay off the mortgage! A standard policy will cover exterior and interior damage from incidents like vandalism, fire, wind and lightning. It also covers loss of use expenses, damage to structures like sheds or gazebos, and liability and medical costs if someone is injured on your property. Personal property is covered, too – good news if you really do have your eye on that big-screen TV.
Still, standard policies aren’t comprehensive. To help you estimate how much you’ll spend on insurance, keep these points in mind:
- Standard policy coverage can be for the cash value of your home and possessions (which may depreciate over time), repair or rebuilding costs based on the original value of the home, or replacement costs that exceed your limit if necessary. Coverage does not equal the sale price of your home because you will always have the land, even if the property is completely destroyed.
- Talk with your insurance company about the different levels of insurance coverage that you can purchase: actual cash value, replacement cost, and extended replacement cost/value.
- Actual cash value covers the cost of the home plus the value of your belongings after deducting depreciation (i.e., how much the itmes are currently worth, not how much you paid for them.
- Replacement value policies cover the actual cash value of your home and possessions without the deduction for depreciation, so you would be able to repair or rebuild your home up to the original value.
- The most comprehensive is the extended replacement cost/value, which pays for whatever it costs to repair or rebuild your home.
- Residents in earthquake-prone areas might also want to supplement their standard policy, which doesn’t cover damage directly resulting from seismic activity. However, if a quake leads to further damage, such as a burst gas line causing a fire, your standard policy will cover it.
- 90% of natural disasters result in some form of flooding – that’s a risk insurers just don’t want to take. Even if your home isn’t in a flood area, you may want coverage anyway if you have a finished basement. You can obtain a separate flood insurance policy through the National Flood Insurance Program (NFIP). And don’t delay – it takes 30 days for new policies to go into effect.
- Projects like building a porch or another bathroom can add significant value, so you may need to adjust your policy if you’re planning to renovate your new home. Upgrades (like a new roof) can lead to discounts if they mitigate risks, but potentially hazardous features (like a pool) may require up to $500,000 in coverage. Just remember that your insurance coverage is not a one and done. You should check in with your insurance agent annually to make sure that you have enough coverage.
It may seem costly, but protecting what’s likely the largest investment you’ll make in your lifetime is worth it – and peace of mind is priceless. Think about what you actually need - rather than just the minimal amount that will make the lender happy.
Finally, in shopping for a policy, get quotes from several companies, and definitely check with any insurer that you are currently working with, such as your car insurer. Current clients often get better deals or you can get a lower rate by bundling your insurance coverage.
Obviously, however, you don't need homeowners insurance until you find a home. To do that in the DC metro area, please give us a call at the Lise Howe Group at 240-401-5577 or email us at lise@lisehowe.com.
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