Home Insurance Guide for First-Time Buyers
Renter's policy no more! Here are the steps to take to protect your new home
By Melanie Wanzek
The topic of insurance can be daunting even for the most seasoned homebuyer. But don't wait until it's time to sign for your home to think about it - the more research you do in advance, the more comfortable you will feel the day you move in. Consider the following choices below before buying to avoid the wasted money and unnecessary heartache that can result from overpaying on your policy or paying out-of-pocket in an emergency.
As the most basic form of house insurance, homeowner's insurance is required for anyone who takes out a mortgage. It covers the home, any ancillary buildings (such as garages or sheds) and personal property. Even for those paying with cash, homeowner's insurance is important to cover investments in the case of serious circumstances. "It provides basic financial protection against a variety of losses, such as theft, fire, hail, tornado or that dump truck now parked in your living room," says Andrew Wallingford, author of "The Claim Game" (Quarter Sawn Books, 2009). "This protection shields homeowners from potentially crippling financial loss." While most insurers include full replacement cost coverage for the home and its contents, some require additional endorsements to cover personal property.
Though it may be tempting to just sign the dotted line to move along the buying process, don't immediately settle with the first package the insurer presents. Melissa Walters, co-author of "Make No Mistakes About Buying Real Estate" (Mill City Press, 2009), says the biggest mistake first-time homebuyers make is to not read through their homeowner's insurance contract carefully to determine what is and is not covered. Think critically about whether you need personalized additions; for instance, if you have a home office, you need an additional endorsement for business pursuits. Also remember to document all your personal property through video recording to ensure you have proof of what you covered.
Ancillary insurances, such as flood insurance or earthquake insurance, are add-ons that are often missed by first-time homebuyers if not required. But even for homes outside zone requirements (for instance, if it isn't located in a flood zone), investing in the policies may be a wise choice. "A high percentage of claims involve homeowners with water problems who are not in a flood zone," says Sid Davis, author of "A Survival Guide for Buying a Home" (AMACOM, 2009). "Most people don't realize that basic homeowner's insurance doesn't cover water damage from outside the house - there are a lot of problems that can really zap you." He says many things, even the construction of a new subdivision nearby, can spur drainage problems that lead to serious water damage.
Mortgage protection insurance shields a homeowner's spouse from financial responsibility in the event that the owner passes away before paying off the mortgage. According to Walters, mortgage insurance is one of the biggest things insurers like to sneak in that buyers are sometimes not aware of. "Essentially you can achieve same thing by getting plain old term insurance," she says. "It's enough coverage to pay off the house, as well as whatever else."
Private mortgage insurance is a different type of coverage that is connected with conventional loans. Lenders require it for anyone who makes a down payment of less than 20 percent in order to protect their investment in the event that the homeowner defaults.
Title insurance protects a homebuyer from other individuals making a claim on the property. The policy is paid for by the seller but can be negotiated by the buyer. For example, if a relative of the past owner later insists he has ownership of the land, title insurance protects the buyer against the legal costs associated with the investigation and research. In most states, it is required; however, if you choose to buy in cash then you must insist on getting a title policy that guarantees you against fraud and problems that could later arise.
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