How to Approach Buying Home Insurance for the First Time

Proactive research will make the home buying process easier.

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Buying your first home is an exciting yet daunting process. There are many steps to take before the keys are finally in your hands, and purchasing homeowners insurance is one of them.

Here's what you need to know to feel confident with your chosen policy.

What home insurance is — and isn't

Homeowners insurance, sometimes called hazard insurance, pays for damage from specific "perils" such as fires, windstorms, explosions, theft and vandalism.

A standard home insurance policy typically covers:

  • Your home.

  • Other structures (such as a garage, shed or fence).

  • Personal property (such as furniture and electronics).

  • Additional living expenses. For example, if you need to leave your home temporarily while it's being repaired for a covered claim, this will cover associated costs.

  • Personal liability. Coverage if you're sued for injuring someone else or damaging their property.

  • Medical payments. Coverage if someone is hurt on your property.

Don't confuse home insurance with a home warranty, a plan that can replace or repair appliances and mechanical systems in your home. Unlike home insurance, a home warranty covers general wear and tear.

First-time home buyers might also mix up home insurance and private mortgage insurance. Wondering what the difference is? "We get that question a lot," says Michael Soler, a mortgage lender for Regions Bank in Melbourne, Florida. PMI is insurance for your lender in case you stop making payments. You may need to buy PMI if you put down less than 20% on a conventional loan.

If you're confused, don't be afraid to ask questions. "It could be very expensive if you don't," Soler says.

Start research early

A great place to start is online, where you'll find home insurance reviews, coverage descriptions and explanations of key terms. You can also work with an independent insurance agent or ask your real estate agent for recommendations.

A real estate agent should have two or three companies they can refer you to, according to Josh Wright, real estate agent and owner of The Wright Group in Nashville, Tennessee. You'll generally find the best rate and coverage if you compare quotes from multiple insurers.

Consider home insurance costs

Avoid sticker shock by working the cost of homeowners insurance into your home-buying budget. Get rough estimates by letting an insurance agent know the areas you're considering moving to and the square footage you're aiming for.

Take note of the age and building materials of the homes you view. Older homes typically cost more to insure than new builds, while houses constructed with durable materials like brick can often be insured for less.

To save on home insurance, look for discounts. For example, you could save by bundling home and auto insurance, installing protective devices in your home and being a new customer.

Determine your deductible

You'll pay a deductible if you need to file a claim, so think about how much you can afford. The higher the deductible, the lower the premium.

Ask your insurer or agent to pull quotes for several deductible amounts to see how premiums change. For example, homeowners could save an average of 12% per year by increasing their deductible from $1,000 to $2,500, according to a recent NerdWallet analysis of homeowners insurance rates.

You may be comfortable choosing a higher deductible if you have ample savings.

Ask about additional insurance

Homeowners insurance won't cover every disaster. For example, a typical home insurance policy doesn't cover damage from flooding and earthquakes.

If your new home is in a high-risk flood zone, your lender will likely require flood insurance. But it could be a worthwhile purchase regardless of where you live since flooding can occur anywhere.

Homeowners in earthquake-prone areas, like much of California, may also want to consider earthquake insurance, even if it's not required.

Pick your coverage limits

A home insurance policy's dwelling coverage pays for damage to the home's structure. Your dwelling coverage limit should reflect the replacement cost of the house or the cost of rebuilding it if it's destroyed. This is not necessarily the same as the home's market value.

Your insurer will often have access to the public information about your home to estimate its replacement cost. You can confirm the amount by talking to a local contractor.

If you buy a policy online, information on your home will likely fill in automatically. "Don't assume it's correct," says Adam Bakonis, product manager at Mercury Insurance. Instead, he recommends buyers double-check information like square footage by comparing it to the listing or confirming with their real estate agent.

Extended replacement cost is an optional coverage worth considering if your insurer offers it. It pays an additional percentage on top of your dwelling coverage in case your home is destroyed.

Say your dwelling coverage is $200,000 and you have a 50% extended replacement cost. That means your insurer will pay up to $300,000 to rebuild your home. Extended replacement cost acts as a buffer in case building costs rise and your dwelling coverage is no longer enough to cover them.

Your personal belongings are covered as a percentage of your dwelling coverage, typically 50% or 70%. To ensure it's enough, make a home inventory of all your stuff and costly items, and add up the total value. You may need to purchase additional coverage for certain valuables like art or jewelry.

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