Homeowners Insurance is not only an essential support for you as a homeowner, it is also an unavoidable part of a mortgaging process. You are required to have homeowners insurance on the property you are mortgaging, no mortgage will close without it. The lenders’ concern is obvious – your property is the collateral of their expenses, they are not ready to give it all up to rain or fire.
Talking about rain, water, and particularly flooding. Surprisingly enough, it was not until Hurricane Katrina struck, that the whole nation woke up to realize that regular insurance policies did not cover damage from floodwaters (nor hurricanes, nor earthquakes). Too many were unaware that the circumstances required a special federal flood (hurricane, earthquake) insurance policy in addition to their regular one. Moreover, certain carriers did (and some still do) take advantage of this unawareness to avoid payment by claiming the damage was due to flooding even when it was not. Nowadays, flood-related insurance can be required in certain areas, along with a regular policy, to close a mortgage. Generally, your broker should be able to provide you with this information, but you can also do some research yourself. The official on-line resource is the page of the U.S. Department of Homeland Security. You can find out if you are in a risk zone for flooding and the degree of the risk, as it determines the necessity of the insurance. Because there are policies that cover water damage from hurricanes but not from floods, make sure you understand the subtle differences that can disallow one type of damage while allowing for something similar. Check out other risks of your area – it will help you decide what kind of insurance you will want for your property because the main purpose of any insurance is to compensate for losses, not just meet a paper requirement at closing.
The estimate of the insurance charge at closing appears as #11 on the Good Faith Estimate and a little further again on Page 3 as one of the Charges that can change at settlement. The lender may recommend some carrier to you, but it is only a recommendation. You are expected to shop for Homeowners Insurance yourself, which immediately gives you a big variety of choices and options. The most important characteristics of insurance to look at are the deductible and the coverage. The deductible is an unclaimed amount that the borrower pays himself to repair whatever damage resulted from an insured event. It is a set amount and if the repairs cost more than the deductible, you can claim the difference. The higher the deductible – the lower the premiums. The carrier expects that you will be able to pay for most repairs yourself, so they do not need so save really much for you. Do not disappoint them, for as soon as you start claiming even small amounts, even if they do exceed the deductible, you should expect a raise in premiums. Having a high deductible may seem a little bit too costly at a first glance, but experiments have proved, that if one has a high deductible and low premiums policy, he may have to pay for removing a tree fallen on the roof of his house himself, but the amount he had saved on the difference between his low premiums and the imposed otherwise high premiums, compensates for a very big part of the expenditure. In fact, in most cases it turns out cheaper than paying higher premiums all the way and have the carrier compensate for the costs. Be careful not to overestimate your financial potential, though – if something happens, you really have to be able to pay. Your lender may also have a requirement about the size of the deductible, so clear this up before you shop for insurance.
The coverage is always a pain. You must read thoroughly every item that is covered by your policy and make sure it covers everything you need. Some companies try to sneak certain issues, such as mold or dog bites, out. But it is not only the list that is important, but also the degree of coverage. “Guaranteed replacement cost coverage”, that pays the total bill to rebuild your property regardless of the price, is very hard to come by, and where it is available it is very expensive. The other levels of coverage are “actual cash value” (lowest coverage),”replacement cost” and “extended replacement cost”. The key is finding out what coverage you will have if your house is destroyed. A good policy should also take inflation into consideration. Do not forget to pay special attention to flood/earthquake/hurricane insurance. You have to purchase those from the federal government; private companies do not provide this sort of service.
You may also consider a Personal Umbrella Liability Policy. This would extend the coverage even further at a price that many can afford. It is called an umbrella because it is carried over all other liability insurance and is used for a catastrophic loss when primary liability insurance is exhausted or for claims currently not covered. It is exceptionally useful if you (of course, God forbid, but still…) get involved in a car accident or get sued. Say, you fall asleep driving and cause an auto accident with a couple of cars, a driver and passenger in each car and everyone gets hurt and cars are totaled… It is not very likely that your regular liability limits will be enough to pay for everything and everyone. What if they sue you? The court can take everything except one car, basic household furnishings, the value of your house over $150,000 (which means if your house is valued higher you might have to sell it), and up to 30% of your wages for the rest of your life… or the umbrella insurance can pay your way out of this financial mess. It also may cover some more exotic items, such as an accident while driving a golf cart at a golf course. Usually this “umbrella” is available to customers who insure both their auto and home with the same insurance company. Beware, though, because some companies nowadays sell a product called “excess liability” policy, which is not a real umbrella and has a narrower coverage. Be sure to find out exactly what you’re getting.
For people who are not into “extras” very much, there is some advice on how to reduce the regular insurance premiums:
- Even if you do not want Umbrella Insurance, you may still consider buying your auto insurance and homeowners insurance from the same carrier. These companies want as much of your business as they can possibly get, so many offer discounts to their customers who have more than one policy with their company. For you it may also mean less hassle paying the two premiums, as they will be billed to you together.
- You may receive some discounts for being loyal to the company; usually, if you stick with them for 5 or more years.
- Appropriate precautions to safeguard your home will decrease your premium, as well as actually make your house safer: deadbolt locks, smoke detectors, home security systems, burglar-proof bars on your windows, if you can tolerate the look of them, will reduce your premium a lot.
- Here is one for free – do no smoke! Many homeowners are not aware that they can reduce their insurance premium if they stop smoking. Smoking cigarettes is one of the leading causes of home fires. Insurance companies will often offer a discount if no one within the home will be smoking as this offers less risk of a fire happening in your home.
- Inspect all walkways regularly to make sure they are properly lit and free of obstacles. Preventing other people from being injured while on your property, you save yourself from a premium increase triggered by claiming.
The insurance requirements for buying a home may vary from lender to lender, but most of them require that the premium be paid for the first year at closing. If the borrower is starting an escrow account, an additional amount equal to several months’ premiums must be paid to fund the account.
