Homeowners insurance basics for first-time buyers

After the slog of paperwork and applications during the home purchasing process, buying homeowners insurance can often end up an afterthought. However, the joy of your new home can be put into jeopardy because you didn’t choose the right insurance policy. Homeowners insurance gives you peace of mind, covering damage to your property, risk of liability, and protecting you against any legal claims.

Home insurance is essential for any homeowner, but not all policies are created equally. Curbed spoke to experts to answer all your questions about homeowners insurance.

Which type of policy is best?

Like any other insurance, you have different policy options when it comes to homeowners. Here are the key terms to know:

Actual cash value
This type of policy covers what the house might be worth, but not what it would cost to rebuild it. Say you wanted to sell your home tomorrow, and it’s worth $85,000. But if it burns to the ground and the cost to rebuild is $150,000, you risk not having enough coverage.

Replacement cost coverage
Replacement coverage covers repair and rebuilding costs, even if they exceed the market value of your home, and it takes care of things like removal of debris and basement repairs. Most homeowners should get replacement cost coverage, Sarah Haun, a former P & C specialist at Advanced Insurance Designs, Inc., told Curbed in 2016. Some mortgage companies may also require that you have replacement cost coverage.

Named peril policy
A named peril policy is less expensive and covers only what is listed. So if the policy doesn’t explicitly state that it covers tornados, you won’t be covered if your home is damaged by a tornado.

All risk policy
These policies take the opposite approach than the named peril policy; an all risk policy covers any loss to your home unless the policy specifically excludes it. A typical exclusion from an all risk policy is earthquakes.

How much does homeowners insurance cost?

It’s difficult to offer a general cost for homeowners insurance because it depends on the replacement cost, condition, and location of the home. Your credit score and past claims history will also factor in. For example, in Ohio, a homeowner with a good credit score, no prior property claims, and a home in good condition can expect to pay around $700 a year for a $150,000 house, according to Haun.

Speaking to Curbed in 2016, Stacey Giulianti, the chief legal officer at Florida Peninsula Insurance, illustrated the impact geography has on cost with a few examples: In Florida, the average homeowner's insurance is about $2,000 a year, while in Idaho it’s much less, around $550 a year. Georgia you are looking at closer to $950 a year; Oregon $600 a year, and in some places, like Texas, it’s closer to $1,800 a year. Homeowners should keep in mind that extra coverage like replacement cost, water backup, and identity theft will increase the cost of your policy.

How can you save?

The top way to save on your rates is purchasing your home and auto coverage from the same insurance company. Depending on the insurance company, you can expect to save up to 25 percent, according to Haun. Maintaining good exterior housekeeping and staying up to code with things like roofing, electrical, and plumbing can also help reduce insurance cost and save you cash.

Most insurance carriers inspect the exterior of the property whenever they issue new policies and every few years after that. If you are a budget conscious homeowner, keeping your property well-manicured may help reduce your costs.

What does it cover?

A basic homeowner’s policy provides coverage for the dwelling, outbuildings (like garages, sheds, and gazebos), and your personal property (including furniture and clothes) in case of fire, theft, wind, or hail. Liability coverage includes any lawsuits filed against you, meaning that if someone falls and breaks their arm on your property, you’d have liability protection through your home policy.

Your home policy also covers something called the loss of use. If you’ve experienced a fire and can no longer occupy your home, your loss of use coverage would pay for things like hotel costs and unexpected food costs while your home undergoes repairs.

What doesn’t it cover?

A common coverage exclusions is the movement of the earth, which includes earthquakes, sinkholes, and mud flow; these are not typically be covered by almost any policy. However, there may be specialty coverage you could buy for earthquakes.

Mold is another policy exclusion most homeowners don’t consider. Say for instance a pipe bursts, and you clean up the water. But you are unaware that water is in the walls or under the flooring, and it later causes mold. This oversight could end up costing you $100,000 or more to clean up because you didn’t factor in things like repairing the wall and flooring.

Under a basic insurance policy, luxury items like high-priced jewelry or an art collection are not be covered above a certain dollar amount. You can buy supplemental policy for valuable personal property, if needed.

Identity theft coverage is typically not part of a homeowners policy, but it’s something Giulianti suggested homeowners consider buying. A lot of these extras are not expensive, for example, at the time of reporting, Florida Peninsula Insurance, offered an identity theft policy or endorsement to your policy for around $25 a year.

What happens if you don’t have it?

All mortgage companies require that you have homeowners insurance. If you don’t have insurance at the time of the closing, the bank or mortgage company will force place insurance through a carrier of their choice. The policy covers only the structure of the home, and you can "expect to pay double, triple, or even quadruple the price of a private market policy," Haun told Curbed.

Homebuyers who pay cash for their homes often don’t need to purchase a home policy, but Giulianti believes it’s a poor business decision not to. For a few hundred dollars a year, you are protecting what is likely your largest investment.