Insurance 101: A First-Time Homeowners Guide to Choosing a Homeowners Policy

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Insurance 101: A First-Time Homeowners Guide to Choosing a Homeowners Policy

You did it - you officially purchased your first home! There are so many joys that come along with becoming a homeowner, along with a new set of responsibilities. One of those responsibilities is to make sure your home is adequately covered with a homeowners policy. Let’s dive deeper into why you need a homeowners policy, what to look for, and how to choose the right option for you:

Is Homeowners Insurance Required to Buy a Home?

Proof of homeowners insurance is required by your lender prior to receiving both the keys to your new home and the actual home loan needed to close the deal. Until your home is paid in full, your lender holds a lien on your property. In short, it is in their best interest to ensure your property is insured while you pay down the mortgage.

If you happen to purchase your first home with cash or an unsecured line of credit (credit card or personal loan), proof of insurance is not a requirement to close. While homeowners insurance isn’t mandated by any state, it is in your best interest to protect the equity in your home.  

Shopping for Home Insurance

Your loan specialist should notify you when you need to buy homeowners insurance during the mortgage approval process. However, you can start shopping for your policy as soon as you’ve hardened your new address. Shopping for homeowners insurance ahead of time allows you to select the best policy at the best price.

Your lender may provide a referral for insurance coverage, but it’s a good idea to compare pricing, coverages and customer reviews before making a final decision. You can usually save money by bundling your auto insurance and homeowners insurance with the same carrier.

Things to Double Check in a Home Insurance Policy

  1. Personal Property and Liability Coverage Limits

Your personal belongings like clothes, electronics and furniture are insured under Coverage C (personal property) on your home insurance policy. It’s important to make sure this limit is enough to cover everything you own. Remember, certain belongings may fall under a specific category of property that includes a “sublimit” under your policy. Some expensive items, such as jewelry and furs, may require you to add an insurance rider for them to be fully covered. Creating a home inventory list is a great way to gauge the price of all of your belongings.

If you’re liable for an incident that injures someone, Coverage E (Liability) provides you with protection. Be sure to choose a liability limit that covers all of your assets appropriately. If you require higher limits than a home insurance policy offers, consider purchasing an Umbrella Policy to provide additional liability coverage for your home and auto policies.

  1. Exclusions

Most home insurance policies contain a list of things that aren’t covered under the base policy. Some common exclusions are landslides, mudflows and flooding.

Make sure you read this section carefully to identify if there may be a peril that isn’t covered that you’re at risk for. Your insurance agent may be able to add an endorsement to ensure you have coverage.

  1. Deductible

As a first-time homeowner, you’ll want to pay close attention to the deductible listed on your policy. A deductible is the portion of a claim that you’re responsible for, so it’s important to make sure the deductible amount is within your budget.

FOR EXAMPLE: If you endure $11,000 in hail damage and your policy’s deductible is $2,000, you will have to pay the $2,000 before your policy covers the remaining $9,000.

How Your Homeowners Policy Ties Into Your Mortgage and Escrow

Typically, when you purchase a home for the first time, an escrow account is created to hold the funds designated to your home insurance and property taxes. This amount, which is typically a few hundred dollars, is added onto your normal mortgage payment every month so your lender/mortgage servicer can place these funds into an escrow account.  

Your lender will pay the fees due on your home insurance and property taxes on your behalf from the escrow account. Escrow accounts are used to ensure you stay up to date with your home insurance and property taxes.

Is Escrow Required?

Loans financed through the Federal Housing Administration do require you to have an escrow account. A conventional loan may or may not have this requirement. When you have very little equity built into your home, this escrow account is a way for your lender to ensure the property is properly protected.

If your lender does not require you to have an escrow account, be aware that your homeowners premium is not being paid for within your mortgage, so you must pay it separately.

Do I have to pay for Homeowners Insurance at Closing?

Lenders typically require you pay the first term of your homeowners insurance at closing. You can expect to pay roughly 10% to 20% of your annual home insurance premium in your closing costs so your lender can deposit those funds into your escrow account for the next billing cycle. If you do not have escrow set up, it is common practice to pay your first years home insurance premium at the time of closing.

Mortgage Insurance vs. Home Insurance

Most lenders will require you to pay private mortgage insurance (PMI) if your down payment is less than 20%. PMI insurance is a safeguard for your lender and it doesn’t insure your property at all. It is typically added to your monthly mortgage payment to protect your lender in case you default on your loan.

Home Warranties Do Not Substitute Home Insurance

Many first-time homeowners confuse a home warranty with home insurance. A home warranty is designed to supplement your home insurance in the event of a mechanical breakdown or normal wear and tear to major home appliances. For example, if your furnace stops working, a home warranty plan can repair or replace it.

Rockford Mutual offers Equipment Breakdown Coverage for an additional premium to cover these appliances on your homeowners policy, if you would rather not have a separate home warranty. Be sure to ask your RMIC agent about the options available and whether a home warranty is the better option for you or not.

Which Home Insurance Policy is Right for You?

There are several types of homeowners policies available that can be tailored to your property type. Whether you own a home or a condo, you want broader coverage or more narrow coverage – there are options available to suite your needs. This is one everlasting benefit of working with an independent insurance agent, because they are able to understand your needs on more of a personal level and recommend coverages that suite you best.

How to Get Homeowners Insurance through Rockford Mutual

Rockford Mutual proudly represents 200+ independent agencies located in the states of Illinois, Wisconsin and Indiana. Use our agent locator to find a local RMIC agent near you and request your free, personalized quote today!

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Amy Casey
Social Media & Communications Specialist
Amy joined Rockford Mutual in January of 2017 with an Associates Degree in Marketing. Amy has a great understanding of insurance in general as she has obtained her Associate in General Insurance designation.