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Homeowners Insurance for First Time Home Buyers

What first time homebuyers need to know when shopping for an insurance policy to protect their new investment - their first house.

young couple in front of first house

Purchasing your first home is both nerve-racking and exciting. With so many things to consider, home insurance sometimes takes a backseat. But getting a good homeowners policy at a great price is vital. Don’t wait until you’re closing on your first house to shop for home insurance!

As a new home buyer, you probably don't have the time to learn everything about homeowners insurance. We’ll make it simple. This article will cover the most important aspects of buying homeowners insurance for the first time:

  • Why you need home insurance
  • How much home insurance costs
  • Home insurance rate factors
  • The best home insurance companies
  • How much home insurance coverage you need
  • What type of policy you should choose
  • How to save money
  • What homeowners insurance doesn’t cover
  • Frequently asked questions

Why Homeowners Insurance is Important for New Home Owners

Unlike car insurance, homeowners insurance isn't required by law. But if you buy your house with a mortgage, you probably need it. Since the lender holds a lien on the house until you pay off your mortgage, they require homeowners insurance. It protects their investment.

If you purchase a home with cash, or once you pay off your mortgage, you technically don’t need homeowners insurance. But we don't recommend skipping it.

Why? A home is most people's biggest asset. It also contains most – if not all – of your belongings. Without homeowners insurance, your home and possessions aren't protected in the event of accidents, disasters, fires, theft, and more. Why wouldn't you invest money to secure your home and belongings?

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How Much Does Homeowners Insurance Cost for First Time Buyers?

The exact price of a home insurance policy depends on a lot of factors. We’ll cover those soon. But first, we can give you a rough price estimate for home insurance costs.

The Insurance Information Institute tracks home insurance rates across the country. In 2015, the most recent year this data is available, an average home insurance policy cost $1,173 per year. That’s $97.75 per month. But rates depend heavily on where you live. The most expensive state is Florida, with an average policy cost of $1,993. On the other hand, Oregon has the cheapest average rate at $643 per year.

According to Zillow, homeowners insurance typically costs $35 per month for every $100,000 of home value. As an example, if you your house is worth $500,000, expect to pay about $175 per month for home insurance.

Of course, that’s just a general estimate. Every house and insurance company is different, and your price will vary. Your specific policy price depends on several factors.

Home Insurance Rate Factors

Insurers rely on several factors to price your policy. These are the most important ones:

Your home

How much would it cost to rebuild your home from the ground up? That's a big part of the price of your insurance policy. "Home insurance coverage is calculated based on the amount of money required to rebuild the property," says Stacey Giulianti, Chief Legal Officer with Florida Peninsula Insurance Company.

Also, older homes usually have higher premiums, because they're more likely to have issues or be out of code. Similarly, homes with unreliable wiring, out-of-date plumbing, or faulty air conditioning and heating cost more to insure.

Location

Where you live is one of the most important factors in the price of your policy.

Is your home in an area with property high crime levels? Do you live near a coastline, or an area that's susceptible to floods and hurricanes? Is your home located in an arid climate where forest fires occur? If so, your insurance rates rise. On the other hand, houses close to fire stations and emergency services qualify for lower rates.

Your deductible

A deductible is how much you must pay out-of-pocket on a claim before your insurance kicks in. A higher deductible leads to lower premiums. You should choose a deductible that works within your budget.

Your credit

Insurance companies use your credit score to help determine your premium. Studies indicate that people with poor credit can pay as much as 91 percent more for home insurance than people with great credit.

"Many first-time buyers aren't aware that insurance companies take your credit score into consideration when determining your rate," says Randall Yates, founder and CEO of The Lenders Network. "Before you start shopping for home insurance you should pay down your credit card balances."

Coverage levels

It should come as no surprise that more coverage costs more money. Choosing your ideal coverage levels depends on your finances, risk level, and, of course, your home.

Company

Every insurance company offers their own discounts, coverage options, policy types, and prices. No insurance company is the same. Which one is best?

Best Home Insurance Companies for First Time Buyers

It’s hard to say which insurance company is the best. Why? Every homeowner has different needs, and what’s best for one person won’t be best for another.

But some companies are a cut above the rest. Our report on the Best Homeowners Insurance Companies found that these companies stand out:

Amica

Best overall home insurance company

Erie

Most extensive coverage options

State Farm

Best for pet owners

Allstate

Best for local agents

Farmers

Best for eco-friendly green houses

Travelers

Best for flexible policies

Liberty Mutual

Best for quick and easy quotes

Hartford

Best for seniors

Nationwide
Best replacement coverage

Auto Owners

Best overall claims experience

MetLife

Best for bundling

AmFam

Best for homes with smart technology

Read the full report for details on each company including customer reviews, policy options, financial strength, discounts, and more.

How Much Homeowners Insurance Coverage Do You Need?

A home insurance policy covers four things:

  • Dwelling/structure: The physical structure of your home
  • Possessions: Your belongings
  • Liability: You’re responsible for the safety of guests in your home
  • Additional living expenses: Costs you incur when your home is uninhabitable

So, how much coverage do you need for each? Well, for starters, you can read our article ‘How Much Homeowners Insurance Do I Need?' It’s a detailed breakdown on your policy options and ideal coverage levels.

Here’s how much coverage you should have for all four coverage types:

Structure/dwelling

You should buy enough structure/dwelling coverage to rebuild your home from the ground up. How do you determine what that number is? By calculating your home’s replacement cost value.

Don't include the cost of the land in your estimate. To estimate your home's replacement cost, the III recommends multiplying the square footage of your home by local building costs per square foot. You can find out the per square foot construction costs in your area by contacting builders, insurance brokers, or real estate agents.

However, similar sized homes can be extremely different from one another. A 3,000 square foot home with custom finishing, high end appliances, fancy trim, and high-quality materials will cost much more to rebuild than a standard 3,000 square foot home. That’s why you need an accurate replacement cost value.

Possessions

According to the Insurance Information Institute, most homeowners policies include possession coverage at 50 to 70 percent of your structure/dwelling coverage.

Is that enough for you? You'll need to create an inventory list of your possessions to decide. If you think you require more coverage than provided, you can always purchase higher limits.

You’ll need to decide between Actual Cash Value and Replacement Cost. It’s how your insurance company values your possessions when they're damaged.

Replacement cost is the amount it costs to replace an item with the same item after a loss. Actual Cash Value (ACV) uses the current market value to replace items. ACV takes depreciation into account, while replacement cost does not. So older items will naturally lose value over time under ACV. Insurers calculate ACV by subtracting an items depreciation from its replacement cost.

Replacement cost policies are overall better than ACV policies. Your items and home retain higher value because depreciation is not accounted for.

If you have more belongings than coverage, or if you have high-value belongings, consider adding a rider. Riders are especially helpful for the following items:

  • Antiques
  • Firearms
  • Jewelry
  • Rare coins
  • Important documents
  • Stamp collections
  • Instruments
  • China

Additional living expenses

Most home insurance policies base additional living expenses (ALE) on the amount of your dwelling coverage. A standard policy will provide 20 percent of your dwelling coverage amount for ALE. For most people, that’s enough.

Liability

Most standard home insurance policies provide $100,000 in liability coverage. That's on the smaller side, so we recommend you purchase at least $300,000 in coverage. It’s not that expensive to add more liability to your policy. And if someone gets injured on your property, medical bills and lawsuits will quickly eat up that $100,000.

Even though it sounds like a big number, even $300,000 in liability really isn't a lot. This is especially true for people with lots of assets or high-value homes. And if your home has high risk factors like trampolines and pools, good liability coverage is vital.

"Homeowners should have sufficient liability insurance," says Giulianti. "Those coverages are relatively inexpensive and should be maxed out wherever possible."

If you need more coverage, consider purchasing an umbrella policy. This is a policy-add on that covers liability costs exceeding the amounts on your policy. Umbrella policies are usually available in million-dollar increments, from one to ten million dollars.

What Type of Home Insurance Plan Do You Need?

Homeowners insurance is not one size fits all. There are several different types of homeowner’s policies (forms):

  • HO-1 — basic
  • HO-2 — broad
  • HO-3 — special
  • HO-5 — comprehensive
  • HO-7 — mobile home
  • HO-8 — older home

The most common homeowner’s policy is the special form, or HO-3. It covers more perils than HO-2, the broad form. There’s a reason it’s the most popular type of homeowners insurance policy. That’s why we recommend it for first time home buyers. 

But since there are so many options and variables, doing your research is vital. We recommend that you speak to a local independent agent.

How to Save Money on Homeowners Insurance

Don't overpay for home insurance. Follow these steps to get the best possible deal on your policy:

  • Get secure: Making your home safer is a surefire way to earn a discount. Burglar alarms, security systems, smoke alarms, and strong deadbolt locks all qualify as safety improvements.
  • Modernize: Updating your home's plumbing and wiring is an effective way to lower your insurance premiums. Plus, it'll boost your home's resale value. Adding smart tech like cameras, automatic lighting, Bluetooth thermostats, and door sensors can also score you a discount.
  • Bundle: Purchasing home insurance from your auto or life insurance company can lower your rates by up to 25 percent. Think of it as a bulk buy discount.
  • Shop around: Everybody knows that buying insurance is an arduous process. But it's necessary to get the best deal. "It's easy to just go with the first insurance company you speak to," says Yates. "Choosing the wrong home insurance company could end up costing you hundreds of dollars every year." Since every insurance company has their own metrics to price a policy, your rates will vary from company to company. If you want to get the best deal, you need to shop around and compare quotes for first-time homeowners from multiple insurance companies.
  • Raise your deductible: If your premium is just too high, consider lowering your deductible. It'll instantly lower your rate. Lowering your deductible is not a decision to take lightly, so make sure you do your research.
  • Add insurance to your mortgage payment: Your mortgage lender may require you to open an escrow account. You can add your insurance premium into your monthly escrow payments. The mortgage lender will manage the account and make the insurance payments for you. While it won't necessarily save you money, it'll make your life easier. If you have an FHA loan, most banks will also require that you purchase a homeowners insurance policy. This is another common situation where an escrow account is beneficial.

What Homeowners Insurance Doesn’t Cover

One of the most common homeowners insurance mistakes is assuming you’re covered. But there are plenty of things that aren’t covered. Most home insurance policies won't cover these events:

  • Earthquakes
  • Injuries from a home business
  • Dog bites from dangerous breeds
  • Sinkholes
  • Unsecured attractive nuisances like trampolines and pools
  • Sewer backup
  • Claims from tenants
  • Construction damage
  • Floods
  • Mold
  • Sewer backup
  • Jewelry and collectors' items

Elizabeth Dodson, co-founder of home management software company HomeZada, says consumers should be cautious of what isn’t covered in their policy.

She explained that specialty guitars, family heirlooms, and kind art are not always covered. “I experienced this situation first hand. I had items in my home that were not covered. By adding a simple extended rider to my policy, I was able to cover all the items in my home,” Dodson said.

Don't Forget About Floods and Earthquakes

Where you live will dictate the type of homeowner’s insurance you’ll need. Some areas need flood insurance. Others need earthquake insurance. And standard home insurance policies don't cover floods or earthquakes.

You should consider flood insurance even if you don’t live in an area with a high flood risk. "The coverage is extremely affordable and should be on everybody's list for responsible homeownership. Even if you're not in a flood zone," explains Giulianti. "Almost one out of every five flood claims are made for properties that are not in designated flood zones," he warns.

Dan Green, founder of Growella, a financial education website for Millennials, agrees: "Homeowners should always purchase flood insurance. It's cheap, it offers a massive amount of protection, and, given a long enough timeline, three out of four homeowners will need it," he warns.

"US homes are 25 times more likely to flood than to catch on fire," says Green. "A flood can bankrupt you. Homeowners overlook how important that flood insurance is."

So how do you determine if you need extra coverage for disasters? And how do you know what kind of coverage is best for your home? "Speak to an agent that's an expert in your area they'll be able to make professional recommendations," Yates suggests.

Frequently Asked Questions

Q: Do I need to buy home insurance before closing?

A: If you’re using a lender, yes, you’ll need home insurance before closing. It’s part of the process. You will usually need to have a copy of the policy or proof of purchase during the closing process.

Q: Will my homeowners policy protect my belongings?

A: Hopefully! Make sure you ask your insurance agent. You may need a more comprehensive policy to ensure you can replace your belongings should they be damaged or destroyed.

You may need special endorsements or riders to protect especially valuable items such as jewelry, antiques, collectibles, or electronics.

Q: Does the neighborhood I’m moving to affect my insurance rates?

A: The neighborhood and location of your home plays a role in determining your insurance premium. Living in a location with more crime will increase your premiums.  Installing safety measures like an alarm system can reduce the cost of your policy.

Q: What if the home has a swimming pool or hot tub?

A: We love swimming pools and for many first-time buyers a pool or hot tub is a must-have. But these features come at a price. Your homeowners insurance premium is going to be more expensive if a pool or hot tub is on your property. You may even want to purchase additional liability coverage or an umbrella policy if you have assets worth protecting.

Q: How much should I worry about natural disasters?

A: That depends on the location of your new home. Homes with a history of flooding, no matter how long ago, should have flood insurance. If the home is in earthquake country, then earthquake insurance might be a good idea. The same applies if your new home is in an area that could experience a hurricane.

Wildfires can occur almost anywhere. You'll sleep better at night if you know your new home is fully protected from the threat of wildfires.

Q: There are so many home insurance companies available. How do I find the best one?

A: There's no way around it. Shopping for home insurance is a pain. Even if you do tons of research, it's hard to feel confident that you're getting a great deal. But there are three easy steps you can take to rest assured that you're doing due diligence.

First, speak with a local independent agent. They can answer your specific questions and help you tailor your coverage to fit your needs. They'll also be aware of any local intricacies like earthquake risks, property crime rates, and tips for discounts.

Second, do you have life or auto insurance? If so, ask your life or auto insurance company for a home insurance quote. They'll offer large discounts for people who bundle multiple types of insurance coverage.

Third, compare quotes from other companies. Once you know what kind of coverage levels you need, take a few moments to compare homeowners quotes from more than one insurer. That way, you can know you're getting a good deal. "I recommend that you get quotes from three to four different insurance companies to make sure your getting the best rate possible," explains Yates. Comparing quotes manually is time consuming, but we can help you easily compare rates from several home insurance companies.

Q: Which insurance company should I use for homeowners coverage?

A: Start with your car insurance company. Bundling policies can save you as much as 20% on your premium. If your auto insurer doesn't offer homeowners, you may want to consider switching to a company that'll insure both your car and home.

If that doesn’t

Q: At what point in the sale of the home will I need insurance coverage?

A: If you're borrowing money (a mortgage), then you'll need to have a homeowners insurance policy when the sale closes. Mortgage lenders prefer to have homeowners insurance payments included with the mortgage payments, so they can be sure the home is insured. If you don't, the lender may require that the first year of homeowners insurance be paid in full at closing.

Q: Do pets make home insurance more expensive?

A: Possibly. It depends on your pet and your insurance company. Injuries caused by animals, like dog bites, are covered by your liability. If you own a 'risky breed,' your premium will rise.

And if you have a pet that's considered exotic such as tarantulas or foxes, your coverage options become even more limited and expensive.

If you're thinking about getting a pet, consider the insurance impacts.

Q: What do I do if I want to purchase a home but don’t have much credit?

A: When you have a low credit score, get a credit card or take out an auto loan. Don’t open multiple, similar types, of credit accounts at the same time. This will result in a new credit penalty.

Consider talking with a mortgage lender or insurance provider that doesn’t require credit for purchase.

They might be difficult to find. And will probably charge you more for their services. If possible, ask someone with better credit to co-sign for the mortgage.

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