Homeowners Insurance: The Basics

Homeowners insurance is one of those things we all know we need, but few actually understand it completely. Do you know what your policy covers? How much coverage do you actually need? 

Here, we will explore all the basics of homeowners insurance. We will discuss what does homeowners’ insurance usually cover, how to choose the right amount of coverage, and some common myths about it.   

While homeowners’ insurance coverage sometimes excludes floods and earthquakes, it does provide coverage for many common risks, such as wind damage, fire, theft, and vandalism. It also offers liability protection in the event that someone is injured on your property or if you cause damage to someone else’s property.  

There are two most common types of insurance you should know about:  

• Homeowners Insurance-HO3. This is the most common type of policy that covers your home and belongings for open perils, except those that are specifically excluded from the policy.  

• Homeowners Insurance-HO5. This is the highest level of coverage and protection available and covers your home and belongings for all perils except those that are specifically excluded in the policy–regardless of whether the cause is listed or not.  

As a homeowner, you have the option to purchase a policy with different levels of deductibles and coverage limits to help you find the best protection for your needs and budget.  

What Exactly Is Homeowners Insurance?

So, let’s dive right in. Homeowners insurance is a type of property insurance that covers a private residence. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of use of the home, or loss of other valuable possessions within the home.

When it comes to this topic there are a lot of misconceptions. Some people think that it’s optional, while others believe that it only covers the physical structure of your home. In reality, homeowners’ insurance is one of the most important investments you can make in your home.  

There are many different factors that go into determining the cost of homeowners insurance. The most important factor is usually the replacement cost of your home and its contents. Other factors include the age and condition of your home, the amount of coverage you need, the deductible you choose, and any discounts you’re eligible for.  

You should know that there are many homeowners’ insurance companies that offer various deals so you should take your time and compare the rates.  

How Does Homeowners Insurance Work?

If any unfortunate scenario happens to you, all you need to do is call the company you purchased your policy from. They will then send someone to assess the damages and determine how much you should be compensated. Homeowners insurance surely isn’t cheap but it may be very well worth it if any accident does occur.  

Most homeowners’ insurance policies have a deductible, which is the amount of money the policyholder must pay out-of-pocket before the insurer will pay a claim. For example, if a policy has a $500 deductible and the homeowner suffers $5,000 in damages from a covered peril, the insurer will only pay $4,500 to repair the home.  

Keep in mind that you can get homeowners insurance quotes before even closing on the purchase of a house. Shopping for quotes in advance gives you time to make the best decisions about coverage. However, if you have a mortgage, your lender will probably require you to have home insurance in effect on closing day.  

Types of Homeowners Insurance

There are several types of homeowners insurance policies available to protect your home.   

• HO-1. This type only covers your home and personal belongings at their actual cash value. Additionally, it only protects them against 10 named perils, meaning the specific causes of damage or loss such as fire or lightning, windstorm or hail, explosion, theft, smoke, etc. 

• HO-2. This one is a more commonly used policy and a slight upgrade from the HO-1. It covers your house from dwelling meaning the structure of your home at its replacement cost value, and your personal property at its actual cash value. An HO-2 also protects against six additional named perils, including ice, snow, or sleet, sudden and accidental tearing apart, cracking, burning, or bulging of a built-in appliance like a water heater or centralized air conditioner or heating system, volcanic eruption, etc. 

• HO-3. This one provides all-risks coverage for your home and covers your personal property from the same named perils in HO-1 and HO-2 policies. All-risks, or open-perils coverage, means you’re covered for everything except the causes of loss that are specifically excluded in your policy.  

• HO-4. This policy type is specifically for renters (usually called renters insurance). 

• HO-5. The most comprehensive form of homeowners insurance and the second most common policy type for single-family dwellings.  

• HO-6. This type of coverage is designed for condo owners. 

• HO-7. The type of policy you get if you own a mobile or manufactured home. 

• HO-8. A special type of homeowners insurance for older homes that don’t meet insurer standards for other policy forms. 

So, in general, you can choose from an all-risk policy, named perils policy, or limited coverage policy. The best homeowners insurance type will depend on a number of factors, including the value of your home, the risks you are most concerned about, and your budget. 

What Is Covered by Homeowners Insurance?

Homeowners insurance provides coverage to repair or rebuild your home after events like fire, smoke, theft, vandalism, a falling tree, or damage caused by weather such as lightning, wind, or hail. Most standard policies also cover furniture, clothing, and other possessions. In addition, they cover medical expenses and legal fees if people other than you, your family, or anyone else not living in your home is injured on your property.   

Depending on the type you chose there can be a lot of variations to what is actually covered by your specific policy. Most commonly your house and personal belongings will be protected from fire, theft, vandalism, bad weather, etc. Additionally, most people also include coverage for the dwelling. This includes protection for the physical structure of the home, such as the walls, roof, and any attached structures. Personal property coverage for contents of the home, such as furniture, clothing, and appliances.  

You can also choose to include coverage for other structures which provides protection for detached structures on the property, such as a garage or shed. And lastly, there is a loss of use coverage. This reimburses the policyholder for additional living expenses incurred if the home is uninhabitable due to a covered loss.  

What Is Not Covered by Homeowners Insurance?

It is no surprise that most people choose to get the policy that gives them the most coverage from possible events. However, there are a few things that are typically not covered by homeowners insurance, such as floods and earthquakes.   

You may be able to purchase separate insurance policies to cover these events in case you want to. Additionally, damages caused by poor maintenance or neglect are usually not covered. For example, if your roof leaks because you haven’t kept up with repairs, your homeowners’ insurance policy will likely not pay for the resulting damage.  

What Is the Cost of Homeowners Insurance?

After reading our in-depth guide to it, you may be wondering how much is homeowners insurance. Well, the answer to this depends on a variety of factors. The average cost of homeowners insurance is about $1,100 per year or a bit more than $90 a month. Keep in mind that this is just an average and your rate could be higher or lower.  

This number will vary widely depending on the factors mentioned above. The most important factor you need to look at is usually the replacement cost of your home and its contents. Other factors that can affect your rate include the age and condition of your home, the amount of coverage you need, the deductible you choose, and any discounts you’re eligible for.  

Here are some tips to help you get the best rate on homeowners insurance:  

• Shop around and compare rates from multiple companies.   

• Think about increasing your deductible. A higher deductible will usually mean a lower premium.  

• Bundle your homeowners’ insurance with other types of insurance, like auto or life, with the same company. This can often lead to a discount on your premium.  

• Make sure your home is as safe as possible by installing smoke detectors, burglar alarms, and other security features. This could qualify you for a discounted price.  

• Take a look at online homeowners insurance offers as you can get a free quote that can help you know where you stand.  

Homeowners Insurance vs. Mortgage Insurance: What’s the Difference?

If you are looking for a way to protect your home there are two main types of insurance: homeowners insurance and mortgage insurance. Both are important, but they serve different purposes.  

As we already discussed, homeowners insurance protects your home from damage or loss due to events like fire, theft, or severe weather. It also covers you if someone is injured on your property.   

Mortgage insurance, on the other hand, is insurance that lenders will require to protect their interests if you default on your loan. Mortgage insurance doesn’t protect you as a homebuyer. Instead, PMI just protects the lender in case you are unable to make payments.  

Another thing is that homeowners insurance is usually optional and mortgage lenders may or may not require borrowers to have it. Mortgage insurance is typically required if you have a government-backed loan, such as an FHA loan. If you have an FHA loan, you’ll pay both an upfront premium and annual premiums for mortgage insurance.   

With a conventional loan, you may only pay for mortgage insurance if you put less than 20% down when you purchased your home. Private mortgage insurers offer different options for paying premiums, including single premium plans that allow you to pay the entire premium upfront or monthly premiums that are added to your mortgage payment.  

Is Homeowners Insurance Required?

As mentioned, this insurance is optional but more and more mortgage lenders require that the borrower has at least some form of homeowners insurance in order to get a loan.   

Homeowners insurance protects your home from damage or loss due to events like fires, storms, theft, and more so it makes sense why lenders ask for it as a sort of guarantee you will keep up with your payments. It can also help cover the cost of temporary living expenses if your home is uninhabitable due to damages so it may be beneficial for you to look into getting one.  

There are different types of homeowners insurance policies available, so be sure to shop around and find one that meets your needs and budget. And remember, even if your lender doesn’t require it, homeowners insurance is still a good idea to have in case the unexpected happens.  

We suggest you look into title insurance as well as it can protect you from financial losses if there are any problems with the title to your home. For example, if someone sues you claiming they have a legal right to the property, title insurance can help pay for their legal fees. Title insurance can also help if there are any errors in the public records related to your homes, such as unpaid taxes or liens.  

Most lenders will require you to purchase title insurance when you get a mortgage. The cost of title insurance varies depending on the value of your home, but it surely is good to have it just in case.  

Bottom Line

The bottom line here is that homeowners insurance is a must if you own a home. While it may not be always required it is always beneficial in case the worst happens. Home repairs are extremely pricey and you surely don’t want to fix something that isn’t caused by you.  

It can protect you from many different types of disasters, including fire, theft, and vandalism. It can also help pay for repairs or replacement of your home if it is damaged by a covered event.   

We are aware that this insurance can be costly so be sure to shop around and compare rates before choosing a policy and make sure you understand the coverage you are getting for your money.  

We also recommend hiring an advisor if you need any help in this whole process or just need a more personal approach.