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Homeowners Insurance Policies Explained
by Brandon Cornett
When you buy a home, your mortgage lender will require a homeowners insurance policy in order to protect their interest in the home. In most cases, the lending institution owns most of the home during the first years of the home, until the homeowner gains equity. So it only makes sense that lenders want to protect their investment in the home.
But this obligation is only one reason to purchase a homeowners insurance policy. The more important reason (for you) is that the insurance protects your interests as well. For example, if your home were destroyed by fire and you did not have insurance on it, you would be out a lot of money!
Homeowners insurance policies will vary from state to state, and sometimes from county to county within the same state. These differences may include the type of insurance required and the average cost for a policy. For example, if you were to buy a home in Florida, where hurricanes are a serious concern, your homeowners insurance premium will likely be higher as a result of that added threat.
When buying a home, you will normally need to have your insurance policy in place before the closing process (also referred to as the "settlement" process in some areas). In most cases, you will need to show proof that you've paid the first year's insurance premium.
How Much Insurance Do You Need?
Most mortgage lenders require that homeowners insurance policies cover the full amount of the mortgage. But as the owner of the home, you can choose a policy that covers the full replacement of the home and contents within it. So as a rule of thumb, you will be required to have insurance for the full mortgage amount, but you may opt to have additional insurance to cover the contents of the home as well.
Related article: How Much Coverage Do I Need?
Finding a Home Insurance Provider
When researching homeowners insurance, you might want to start with the company that handles your other insurance needs (such as the policy on your car). In many cases, companies will grant discounts for existing customers who have multiple insurance policies with them. These "umbrella" policies can cover all of your insurance needs while saving you money at the same time. There is also a certain convenience factor involved, because you only have to communicate with one company vice several.
Questions About Insurance Policies
When choosing your home insurance plan, speak candidly with the representative and ask pointed questions. This is the only way to fully understand what the insurance policy does and does not cover, and what options you have in terms of coverage.
The key concept to take away from this article is that homeowners insurance policies must, at the very least, meet the mortgage lender's requirements. Once you have met the lender's requirements, you can shape the policy to meet your own needs as well.