There is a lot of opportunity in the real estate market right now. Prices are low, interest rates are incredibly low, and first-time home buyers are in prime position to take advantage.
If you are buying a home, whether it is a single-family home, rental property, condominium, townhouse, or tree house, one of the first things you are going to need to do is obtain the proper insurance coverage. Not only is it the smart thing to do, but it will be required by your lender prior to closing. In fact, you should probably start looking into homeowners insurance as soon as you have an accepted contract on your property.
Here are some important things you will need to know about if you plan to become a homeowner.
Homeowners insurance policies contain coverage that not only protect against losses due to events such as fire, wind, hail and theft, but also against financial losses should someone injure themselves on your property (or as a result of your actions) and decide to take legal action. Homeowners policies have several components, but the three most important are dwelling coverage, personal property coverage, and liability.
Dwelling coverage protects against damage to the home itself from certain risks or ‘perils’ (fire, hail, etc.). The amount of dwelling coverage you should have on your home should be based on the replacement cost of the building. A home’s replacement cost is not the same as the home’s market value.
Replacement cost is an estimate of how much it would cost to rebuild a home to existing specifications, taking into consideration things like material and labor costs. Your insurance agent should be able to determine your home’s replacement cost, and therefore how much dwelling coverage you should have in place. Dwelling coverage is not meant to cover things like routine maintenance and regular wear and tear.
Find out the replacement cost of your home here
Dwelling coverage is subject to the policy deductible. The deductible is how much you (the homeowner) pay out-of-pocket in the event of a loss. Homeowner policy deductibles can vary anywhere from $100 to $10,000, with $500-$1,000 being the most common. The lower your deductible, the more expensive the policy will be. When selecting your deductible, you should try to determine how much you could afford to pay out of your own pocket in the event of a loss.
For example, lightning damages your roof and the estimate is $8,500 to have it repaired. You file a claim on your homeowners policy, which has a deductible of $1,000. Your insurance company will cover up to $7,500 for the repair. However, if the roof is simply old and needs to be replaced, it will not be covered by homeowners insurance.
Another component of a homeowners insurance policy is personal property coverage. Personal property insurance covers the things that you own that are not permanently attached to your home (such as your furniture, electronics, wardrobe, etc.). Talk with your agent to help determine how much personal property coverage you need. Most policies will have a built-in personal property coverage limit, with the option to increase. This coverage is also subject to the policy deductible.
Certain types of personal property may not be fully covered under your basic homeowners policy. Items such as jewelry, furs, guns, coins, currency, and collectibles are subject to specific limits of coverage on a standard policy. If you own any items that are worth more than the specific limits (for example, jewelry is only covered up to $2,500), you can usually purchase the additional coverage you need, and it is often relatively inexpensive.
Both dwelling and personal property insurance will only cover damage or loss resulting from certain events or ‘perils’ (such as fire, wind, or hail), and you should talk to your agent about which perils are covered by your policy. Some policies are more extensive than others with regards to what is covered.
A homeowners policy will also contain liability insurance. Liability insurance covers you against injuries to others for which you are responsible. It also provides coverage for damage to the property of others. The main purpose of liability insurance is to protect the homeowner and his or her family from legal action that could possibly result from such injuries or damage.
Liability coverage can range anywhere from $50,000 to $1,000,000 on your policy. Your agent can help you determine how much liability coverage you should have based on your income and assets. If necessary, additional liability coverage can be purchased in the form of an umbrella policy.
Condominiums (and most townhomes) are covered by policies very similar to homeowners policies. However, as a condo owner you are not responsible for insuring the structure of the building itself. Your condo association should have building coverage as part of their master policy (which you pay via your monthly assessments).
Condo insurance policies (or HO-6 policies) provide property coverage from the walls inward, up to a certain limit, as defined by the policy. When trying to determine how much coverage you should have on your condo policy, you should factor in things such as your furniture, electronics, appliances, wardrobe, and the cost of any improvements you have made to your unit. Condo policies also include liability insurance, which was discussed in the previous section.
In Illinois, interior items such as fixtures, cabinets, and countertops are covered by the condo association’s master policy as long as they were the original items installed by the condo developer. Any improvements or betterments made by the condo owner are not covered by the condo association’s policy, and should be covered by the unit owner.
Depending on where you are buying, you may have to purchase flood insurance. There are certain sections throughout the country that FEMA has determined to be Special Flood Hazard Areas (SFHAs). These are considered high-risk flood areas. If you live in or are purchasing a home in one of these areas, you will be required by law (specifically, by the Flood Disaster Protection Act of 1973) to purchase a flood insurance policy separate from your homeowners insurance. If you do not live in one of these high-risk areas, you still have the option to purchase flood insurance (in most cases), although it is not required by law.
Find out if a property is in a Special Flood Hazard Area
Homeowners insurance does not cover damage from flooding. Most home insurance companies do offer policy endorsements (additional coverage added to your homeowners policy at an extra cost) that cover damage resulting from sump pump failure, or water entering the home when a drain backs up. This is not flood insurance, and will not satisfy your legal obligation if you live in a SFHA.
Mortgage Protection Insurance
The last thing you might want to consider when buying a home or condo is mortgage protection insurance. This is not to be confused with private mortgage insurance or PMI. PMI is insurance that protects then lender against you defaulting on your mortgage. Your lender may require it in some circumstances, and if they do, it will become part of your mortgage payment.
Mortgage protection insurance, on the other hand, is simply life insurance which is purchased for the purpose of paying off the mortgage balance if a homeowner is to pass away. The purpose is to allow the spouse or family of a deceased homeowner to pay off all or part of a mortgage balance and therefore be able to retain possession of the home without the burden of a mortgage.
This type of insurance is not mandatory, and is not purchased as part of your loan like PMI, but rather through private insurance companies. Most of the time the same company that you purchase your homeowners insurance through can also provide you with mortgage protection (life) insurance. This type of insurance can be structured several different ways, and that discussion will be saved for another day. An article describing the basics of life insurance can be found here.
For questions, quotes, and advice, feel free to contact me any time.
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Evergreen Park, IL 60805