MORTGAGE MATTERS

5 min read

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Mar 2022

What Is Homeowners Insurance and What Does It Cover?

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WHAT YOU'LL LEARN

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The definition of homeowners insurance

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What's covered in homeowners insurance

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The different forms of homeowners insurance

filled check icon

WHAT YOU'LL LEARN

check icon

The definition of homeowners insurance

check icon

What's covered in homeowners insurance

check icon

The different forms of homeowners insurance

Your home is one of, if not the, largest investments you’ll make during your lifetime. It’s important to take care of it at all costs. If disaster strikes, you likely won’t be able to afford to fix the damages or replace the home entirely with out-of-pocket funds alone. Luckily, homeowners insurance is there to help should catastrophe ruin your greatest investment.

What Is Homeowners Insurance?

Homeowners insurance is a way of financially protecting your home and personal items. Unlike private mortgage insurance (PMI)An insurance policy that protects the lender in case you default on your loan. Mortgage insurance is required for FHA loans and for Conventional loans when you put down less than 20%.private mortgage insurance (PMI)An insurance policy that protects the lender in case you default on your loan. Mortgage insurance is required for FHA loans and for Conventional loans when you put down less than 20%., homeowners insurance is coverage that will repair or replace your home or personal belongings if they’re damaged or destroyed by disasters such as tornado or fire. It can also cover your liability if a court finds you legally responsible for someone else’s injury while on your property.

Is It Required?

Coverage is not directly required by law, but if you’re taking out a mortgage to fund your home’s purchase, your lender will likely require homeowners insurance. Don’t forget that through the mortgage, the home is your lender’s investment as well. But it’s not a bad idea to protect your biggest purchase with property and liability coverage, either.

How Much Does It Cost?

Unfortunately, there is no catch-all answer to the question, “how much does homeowners insurance cost?” In short, it depends. It depends on the coverage you select or that your lender requires, as well as the makeup of your home and your personal belongings.

We recommend contacting several different companies for quotes, which are estimates of the amount you’ll pay monthly for an insurance company’s policies. We also suggest obtaining these quotes as soon as you’ve chosen your future home because Atlantic Bay Underwriters, and all underwriters for that matter, can process your loan faster if you have all your financial documents ready and on-hand. You get to decide which insurance company you work with, not your lender, so make sure you get a deal that best suits your budget. Plus, the quicker you choose, the quicker the approval process for your insurance can begin and you’ll get a clearer picture of your monthly payment amount.

Your quote is calculated by factors such as your home’s size and location, your credit profile, and the amount and value of your belongings.

How Do I Pay?

Homeowners insurance is usually rolled into your monthly mortgage payment. When you make a payment, your lender will direct the money to an escrow accountA separate account your lender sets up to ensure payment of certain expenses like taxes and homeowners insurance.escrow accountA separate account your lender sets up to ensure payment of certain expenses like taxes and homeowners insurance. they set up in your name. Then, they will pay your insurance company directly with the money from your escrow account. Conveniently, you won’t have to make a separate payment to your insurer.

You can pay for homeowners insurance separately if you make a 20% down payment on your home. By paying for your homeowners insurance without involvement from your mortgage company, you can make your payment at the beginning of the year in one lump sum rather than making contributions every month. It might be less convenient, but it could save you money in the long run.

You should also be aware that the upcoming year of homeowners insurance is included at the closing table. That way, your lender can be certain you and your home are covered for the next 12 months. So, your homeowners insurance will increase the amount of money you’ll have to pay in closing costs.

What Does Homeowners Insurance Cover?

The standard homeowners insurance policy will cover:

  • Damages to the home by a covered event.

  • Personal property stolen or damaged by a covered event.

  • Free-standing structures (i.e., fences or a shed) damaged by a covered event.

  • Liability in case someone is injured on your property.

  • Living expenses while your home is repaired.

  • Medical bills for someone injured on your property.

The monetary amount your insurer will cover varies according to your policy, but these examples represent the standard coverage found in most plans. Similarly, not all plans cover damage caused by the same events. For example, some plans will not cover structural damage caused by hail. Speak with your insurance company before selecting a policy to know which events are covered.

Types of Homeowners Insurance

There are many different types of homeowners insurance that cover different types of events. The different types are often referred to as “policy forms.” The specifics of each policy form differ by state and insurer, but as a rule of thumb, the different types are:

  • HO-1 – the most limited form. Protects against the least number of events.

  • HO-2 – covers dwelling and belongings and their replacement at cash value.

  • HO-3 – the most common form. Protects against all events except those explicitly mentioned as non-coverable (i.e., floods or earthquakes).

  • HO-4 – also known as renters insurance.

  • HO-5 – much like HO-3, but for high-net worth properties in high-risk locations.

  • HO-6 – also known as condo insurance.

  • HO-7 – designated for manufactured, formerly known as mobile, homes.

  • HO-8 – for homes that don’t meet the insurer’s standards for their policies.

That’s only a small rundown of the differences between the policy forms, so for more information, check out your insurance company’s website for more details.

You’ll notice that flood insurance is not included in standard policies, yet flooding is the nation’s most common natural disaster. You are not federally required to have flood insurance unless your home is in a high-risk flood zone and financed with a government-backed mortgage such as FHA. That said, it’s good to know your flood risks. You can enter your potential property’s address into the Federal Emergency Management Agency (FEMA) flood zone map to get a better understanding of your risks.

So... How Much Homeowners Insurance Do I Need?

The amount of homeowners insurance you need comes down to your personal situation. Remember, you’ll need enough coverage to replace the cost of rebuilding your home or your belongings. You can calculate the amount of coverage you need by running through a list of factors about your home, such as construction costs in your local area or your home’s square footage. Check out our article on the basics of homeowners insurance as a good first step in estimating the coverage you need.