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Buying a home is exciting. After all, it’s one of the biggest purchases you’ll ever make. But protecting that home with homeowners insurance can get confusing and raise many questions about when to buy it, coverage amounts, and how to pay for it. This guide will answer your questions.

Here’s what you need to know about home insurance when buying a home:

Is homeowners insurance required?

While no law obligates you to carry homeowners insurance, most lenders require you to get home insurance as a condition of your mortgage.

Homeowners insurance protects the lender’s investment, covering your home and belongings against damage or loss. If a fire, severe weather, or another covered event damages your home while you’re paying on the mortgage loan, homeowners insurance protects your lender from financial loss.

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How to shop for home insurance

Purchasing homeowners insurance is a simple process. Ideally, you’ll purchase a policy with enough coverage to completely replace your home if necessary — without a premium that breaks the bank. Follow these steps to find the best home insurance policy for you:

1. Decide how much home insurance coverage you need

To determine how much coverage to get for your home, consider how much you’ll need to:

  • Completely replace your home.
  • Replace the belongings inside your home.
  • Cover injuries and damages that take place on your property (some experts recommend $300,000 to $500,000 worth of coverage).
  • Cover your living expenses if your home becomes uninhabitable (many home insurance policies offer 20% of your dwelling coverage limit, but you may need more).
Remember: Your home’s replacement cost value is not the same as its market value. That’s because your land factors into your home’s market value, and land is not covered in a home insurance policy — only what’s on it. To estimate the cost to rebuild your home completely, multiply your home’s total square footage by the per-square-foot building costs in your area. A local insurance agent, real estate agent, or builders association can help you determine those costs.

2. Shop around and compare home insurance carriers

It’s important to work with an insurance carrier with good reviews and a solid reputation for handling claims.

Tip: You can use the Consumer Insurance Search Results tool on the National Association of Insurance Commissioners website to look up insurance providers and find out if consumers have filed complaints against them.

Once you’ve narrowed down your search, you can request free quotes from the insurance carriers you’re interested in. It’s always wise to get quotes from at least three home insurance providers to ensure you get the best rates and coverage for you. Consider getting quotes from any insurance carriers you already do business with, since you may qualify for a bundling discount for having multiple policies with the same insurer.

Learn More: Does Home Insurance Cover Burst Pipes?

3. Choose a homeowners insurance carrier and policy

Once you’ve found a homeowners insurance policy you like, you can contact the insurer and buy a policy. You’ll save on your premium if you opt for a higher deductible or lower coverage limits, but remember that you need to be able to afford your deductible if you file a claim, and you need enough coverage to protect yourself if a covered event destroys your home.

Be sure to ask your carrier if you qualify for any discounts, which can lower your premium. For example, you may be able to reduce your rate by installing a home security system or safety devices like smoke detectors. Upgrading your old roof or your heating, plumbing, and electrical systems could yield more discounts.

When to purchase homeowners insurance

If you’re taking out a mortgage on your property, you should start looking for homeowners insurance soon after signing the contract to buy your home. It’s important to start shopping for homeowners insurance right away, as you may delay the closing if you’re unable to secure your policy when you close.

Good to know: You must have your homeowners insurance policy in place on the same date you formally close on your home, since you’ll need to show your lender proof of homeowners insurance before you can get the keys to your new home or your loan.

The timeline for buying home insurance is fairly brief. You can typically get a homeowners insurance quote in a matter of minutes. Once you decide to move forward with an insurance provider, it can take anywhere from a few hours to a few days to actually get home insurance. You can work with your insurer to select an effective date, which is the day your coverage kicks in.

How does home insurance work with mortgage and escrow?

If your down payment is less than 20%, your mortgage lender may require you to use an escrow account to pay your homeowners insurance premium, along with your monthly mortgage payment. Your mortgage lender will typically require you to cover your first year’s worth of homeowners insurance, before or at closing.

When your property taxes and home insurance are due, typically once per year, your mortgage lender pays those expenses on your behalf. If you don’t have an escrow account, you may pay your homeowners insurance on a monthly, quarterly, semiannual, or yearly basis.

Before your home’s closing date, verify if your lender must set up an escrow account on your behalf or if you can take care of it yourself. If setting up the escrow account is your lender’s responsibility, you’ll need to pay close attention to escrow-related documents during the closing process to ensure future homeowners insurance payments are properly distributed.

Learn More: What Is Escrow and How Does It Work?

How else can I pay for my home insurance policy?

Paying your homeowners insurance provider directly may be an option if you make a down payment of 20% or more. In that case, you can typically pay your homeowners insurance using the following methods:

  • Automatic or one-time charge to your debit or credit card
  • Bank account withdrawal
  • Mailing a check or money order
  • In-person payment at your insurance provider’s local office

Is home insurance included in closing costs?

As previously mentioned, some lenders require the first full year of homeowners insurance payments at or prior to closing. Many lenders collect approximately 10% to 20% of your annual premium at the time of closing and hold the money in your escrow account for your next billing cycle.

While your homeowners insurance premium is paid when you close on your home, it’s not necessarily a closing cost. However, if you negotiated for your home’s seller to pay for the premium at closing, this could be considered a closing cost.

Check Out: How to Compare Home Insurance Quotes

What’s the difference between mortgage insurance and home insurance?

Mortgage insurance and home insurance aren’t the same thing. Most lenders require you to pay private mortgage insurance (PMI) — typically between 1% and 3% of your home’s purchase price — when you make a down payment of less than 20%. This protects the lender if you default on your loan. You often pay PMI through the same escrow account as your homeowners insurance. However, the similarities between mortgage insurance and home insurance generally end there.

The main difference between mortgage insurance and home insurance is that mortgage insurance protects your lender’s interests, while homeowners insurance protects your home, belongings, and you.

Good to know: You can request to cancel your PMI when you reach 80% equity in your home. However, you must be current on your payments and have a good payment history for your mortgage.

What’s the difference between a home warranty and home insurance?

Your homeowners insurance offers robust protection for your home and belongings. However, it doesn’t always cover your home’s systems and appliances if they break down. For example, if they’re damaged by a peril that’s not covered, or the cost to replace your system or appliance exceeds your coverage limits, you’re on the hook to pay for them.

That’s where a home warranty comes in handy. It pays for the repair or replacement of electrical, plumbing, HVAC, and other home systems and appliances.

Buying both home insurance and a home warranty may provide you with more complete coverage. If a tree falls on your home and destroys your HVAC system, your homeowners insurance will likely cover it. However, your homeowners insurance doesn’t cover normal wear and tear or mechanical failure of the systems in your home.

So, if your HVAC unit breaks down through normal wear and tear, you’ll have to repair or replace it out of your own pocket. But if you have a home warranty, it could cover the costs to fix or replace the HVAC unit.

Remember: Before purchasing a home warranty, be sure to consider the pros and cons. While it provides extra protection, it also comes at an extra cost. And, since warranties may come with important exclusions, be sure to read all the fine print of a warranty before you buy one.


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Disclaimer: All insurance-related services are offered through Young Alfred.

About the author
Tim Maxwell
Tim Maxwell

Tim Maxwell is a financial writer with over two decades of experience. Tim’s work has appeared in USA Today, Washington Post, Bankrate, LendingTree, Fox Business, Credible and more. He also publishes Incomist, a personal finance site that focuses on paying off debt by earning extra income in creative ways.

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