Homeowners Insurance 101: A Buyer’s Guide to Protecting Your Home

When it comes to life’s milestones, younger generations still aspire to the American dream of owning their own home.

While higher interest rates and inflated home prices remain a hurdle in 2024, the dream remains alive as 67 percent of prospective homebuyers would prefer to own their own home for a sense of permanence and emotional stability, according to the new Bank of America Homebuyer Insights Report released in May 2024.

At Dean & Draper, we know that buying your first home can be exciting but challenging as it comes with a steep learning curve of specific homebuying details from how to finance or secure a mortgage to understanding interest rates to maneuvering the ins and outs of homeowners insurance.

“Purchasing a home can be an exciting event that can also come with new responsibilities and questions, especially for first-time buyers. One primary challenge is having a sound financial plan to pay repair or rebuilding costs if the house becomes damaged by peril–fire, earthquake, storm, etc.” says the Insurance Information Institute (iii). “A homeowners insurance policy with the right type and amount of coverage can help protect a buyer's investment and financial future. This benefit is why lenders may require proof of a policy before the final approval of a mortgage.”

Many of the new homebuyers we work with often want to know when exactly you need to get this insurance and what it covers. This guide will walk you through the essentials of homeowners insurance, helping you make informed decisions to protect your new investment.

When to Get Homeowners Insurance

The home search and mortgage application and approval process can be a bit overwhelming so many new homebuyers may put homeowners insurance on the backburner but delaying this important coverage could be a mistake.

“Lenders might not approve or release funds for your mortgage without proof of an insurance policy,” says the iii.

And in today’s world, not many of us are closing on homes in all-cash deals so you need to get homeowners insurance before you close on your new home.

Here's a breakdown of the timeline:

• Start shopping for insurance as soon as your offer is accepted.
• Secure a policy at least a week before closing.
• Provide proof of insurance to your mortgage lender before closing.
• Coverage should begin on your closing date

Remember, most lenders require proof of insurance before finalizing loans. Plus, having insurance in place from day one ensures you're protected as soon as you take ownership.

“You could lose everything you own and pay out of pocket to rebuild, repair or replace your home and belongings if a fire, natural disaster, or other event were to strike your home,” says the iii about those without home insurance coverage.

What Homeowners Insurance Covers

Becoming a new homeowner comes with its own unique terminology and the insurance portion is no different.

Homeowners insurance is a package policy that typically covers four main areas:

• Dwelling Coverage: This protects the structure of your home, attached structures (like a garage), and other detached structures (such as a barn or shed) from damage due to covered perils such as:
  • Fire and smoke.
  • Lightning strikes.
  • Windstorms and hail.
  • Vandalism.
  • Theft.

Dwelling coverage, says US News, is the keystone of your homeowner's insurance policy. It pays to repair, replace, or rebuild your home’s structure after a covered peril.

• Personal Property Coverage: This covers your belongings inside the home, including:
  • Furniture
  • Clothing
  • Electronics
  • Appliances
  • Heating and cooling systems

If you have high-value items, such as artwork, collectibles, or jewelry, it may require additional coverage.

• Liability Protection: This covers you if someone is injured on your property or if you accidentally damage someone else's property. It can help with:
  • Legal fees.
  • Medical expenses.
  • Repair costs.

Homeowners' policies may also cover medical payments to individuals, not immediate household members, when they are accidentally injured on your property, according to US News.

• Additional Living Expenses: If your home becomes uninhabitable due to a covered loss, this coverage helps pay for temporary living arrangements.

Types of Homeowners Insurance Policies

There are several types of homeowners insurance policies, but the most common for single-family homes is the HO-3 policy. This provides "open peril" coverage on the home itself and "named peril" coverage on personal property.

• Open peril: Covers all risks except those specifically excluded in the policy.
• Named peril: Covers only the specific risks listed in the policy.

To understand your new HO-3 policy, you will need to read it carefully and ask your insurance agent to clarify any questions you have on the policy.

Other policy types include HO-1 (basic), HO-2 (broad), HO-5 (comprehensive), and HO-6 (for condos):

• HO-1: The most basic homeowner’s insurance available, offering very limited coverage, often for these 10 perils: fire and lightning, windstorms and hail, explosion, riots, and civil commotion, damage caused by aircraft, damage caused by vehicles, smoke, vandalism and malicious behavior, theft, and volcanic eruptions.
  
  
• HO-2: Broader than HO-1 coverage. HO-2 covers everything in HO-1 plus other items such as falling objects, the weight of ice, snow, or sleet, certain types of water or steam damage after accidental overflow from systems within the home, frozen pipes and damages, and power surges.
  
  
• HO-3: Most common homeowners policy, with this all-perils policy covering most damages with a few notable exceptions such as flood, earthquake, and war.
  
  
• HO-4: This is renter’s insurance, something new home buyers are looking to leave behind.
  
  
• HO-5: Must like HO-3 but the difference is HO-5 policy offers the replacement cost for both the dwelling and your personal belongings, while HO-3 policies only cover personal items at actual cash value.
  
  
• HO-6: Condominium insurance for those new homebuyers not buying single-family dwellings.
  
  
• HO-7: Mobile home insurance for everything from a fifth-wheeler to double-wide.
  
  
• HO-8: Modified coverage for situations such as historic homes with ornate details or features that are hard to replace.
  
  

The iii says: "Standard homeowners policies provide coverage for disasters such as damage due to fire, lightning, hail and explosions. Homeowners who live in areas where there is the risk of flood or earthquake will need separate insurance coverage for those disasters, as well. In every case, you’ll want the limits on your policy to be high enough to cover the cost of rebuilding your home in the event of a total loss. The price you paid for your home—or the current market price—may be more or less than the cost to rebuild. And if the limit of your insurance policy is based on your mortgage (as some banks require), it may not adequately cover the cost of rebuilding."

It can be tough for new homeowners to understand the differences between actual cash value (ACV) and replacement costs (RC) and other language in insurance policies. Here's a cheat sheet:

Factors Affecting Homeowners Insurance Costs

The cost of homeowners insurance may surprise first-time buyers as premiums have been rising across the country.

Market Watch Guides says that the average cost of homeowners insurance in July 2024 was $2,511 or $209 per month with Oklahoma, Nebraska, and Texas having the highest average annual home insurance premiums.

Rates in Nebraska and Texas average nearly $5,00 per year, while Oklahoma leads the nation with averages near $6,000 per year.

Several factors can influence your insurance premiums:

• Home's location (proximity to fire stations, crime rates, natural disaster risks).
• Construction type and age of the home.
• Claim history of the property.
• Your personal claims history and credit score.
• Coverage limits and deductible amount.
• Special features (swimming pool, trampoline, etc.).

Understanding these factors can help you anticipate costs and potentially find ways to reduce your premiums.

Insurance Tips for First-Time Home Buyers:

• Don't wait until the last minute to shop for insurance. Start early to compare quotes and coverage options.
  
  
• Consider bundling your homeowner's insurance with other policies (like auto insurance) for potential discounts.
  
  
• Ask about available discounts for safety features like smoke detectors, security systems, or impact-resistant roofing.
  
  
• Understand the difference between replacement cost and actual cash value coverage for your belongings.
  
  
• Create a home inventory to ensure you have adequate personal property coverage.
  
  
• Review your policy annually and update it as needed, especially after major home improvements or valuable purchases.
  
  
• Set an appropriate deductible. A higher deductible can lower your premium but means you'll pay more out-of-pocket if you file a claim.
  
  

Dean & Draper Can Help Insure Your Dream

Homeowners insurance is a crucial part of protecting your new home and financial well-being.

By understanding when to get it, what it covers, and how to choose the right policy, you're taking an important step in responsible homeownership.

Remember, your insurance needs may change over time, so it's important to review your coverage regularly and adjust as necessary.

Ready to protect your new home? Don't leave your dream uninsured. Contact Dean & Draper today for a free quote and expert guidance on finding the perfect homeowners insurance policy for your needs.

The recommendation(s), advice, and contents of this material are provided for informational purposes only and do not purport to address every possible legal obligation, hazard, code violation, loss potential, or exception to good practice. Dean & Draper Insurance Agency specifically disclaims any warranty or representation that acceptance of any recommendations or advice contained herein will make any premises, property, or operation safe or in compliance with any law or regulation. Under no circumstances should this material or your acceptance of any recommendations or advice contained herein be construed as establishing the existence or availability of any insurance coverage with Dean & Draper Insurance Agency. By providing this information to you, Dean & Draper Insurance Agency does not assume (and specifically disclaims) any duty, undertaking, or responsibility to you.  The decision to accept or implement any recommendation(s) or advice contained in this material must be made by you.