What is Homeowner's Insurance, and Why Do You Need It?

Homeowner's Insurance Policy

If you're a first time home buyer, you might be surprised to find out that you most likely need to buy a homeowner's insurance policy BEFORE your property closes. It will be true for everyone who secures a mortgage loan; even cash buyers frequently obtain a policy.

This small differential in buyers illustrates the usual reason one needs a policy:  the lender will require it of you, as a condition of the mortgage.  It's understandable if you look at a smaller scale example:  If you buy a car using a car loan, you're probably already familiar with having to show that you have replacement coverage (in addition to whatever the state requires for liability.) The lender wants to ensure that, should something devaluing happen to the car, their own financial stake in the car is protected - that is, they'll get their money back in full, if the car is totalled.  This is because your loan is secured by the value of that car.

Similarly, a mortgage is secured by the value of your property.  The lender will want to see that their stake in your property is protected from potential harm. In addition to covering damages that devalue a property (think windblown tree through the roof), your policy protects you from liability - financial responsibility - should an accident occur on the property, for which you are at fault.  This is similar to car insurance too.

One difference from car insurance you'll notice as a mortgage-holder, is that you typically do not pay for your homeowner's insurance directly.  It is usually collected by the lender along with your monthly payment and held in escrow (along with property taxes, and possibly mortgage insurance) to be paid annually.  This is an extra measure of security for the lender, against borrowers who let policies lapse on rather valuable property.  This is something to bear in mind when considering your expected monthly payment for the new property loan; it will cover more than the debt servicing.

One big variable from homeowner to homeowner, is how big the policy ought to be. Your own financial advisers are your best resource here; needs vary a lot.  You may have a lot of other assets that require coverage, or you may be just starting out on your financial life, with a modest property and few other assets.

If you've been a renter, you may have (should have!!) renter's insurance for your personal belongings.  You'll be pleased to know that homeowner's insurance is not typically a wildly different price.  It's usually in the same ballpark - some people even find it less expensive.

When you are considering insurance providers, the first place to check is whomever provides your current renter and/or auto policies.  You'll be familiar with their customer service already, and may find you get a discount for keeping all of your policy business under one umbrella.  Be sure to check the reputation the company has for paying claims, as that is when things really matter.  This recent article by US News & World Report ranks popular providers, and can give you a starting place.

If you're considering a property transaction soon, please give us a ring at Dupuis Team - we'd love to walk you through the whole process!

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