Homeowners insurance and your home buying budget

By Michele Lerner on November 1st, 2010

Homeowners Insurance

First-time home buyers often focus on the price of the home they want to buy, followed by the interest rate on their mortgage loan. Potential buyers also need to budget for these items in their monthly housing payment: taxes and homeowners insurance.

"First time home buyers should spend the time to compare home insurance policies because they will be paying insurance premiums as long as they own the home," says Don Griffin, vice president of personal lines at the Property Casualty Insurers Association of America (PCIAA). "Homeowners need to recognize the importance of protecting their investment."

Homeowners insurance protects your real estate investment

Homeowners insurance, required by lenders, provides financial protection against unforeseen circumstances that can damage or destroy your home. According to the Insurance Information Institute (III), a standard property insurance policy covers the home itself, the contents and your liability for any injuries or property damage you cause to others. Griffin says almost all homeowners opt to cover their personal belongings because the extra cost is minimal, although lenders only require structural damage coverage.

"Homeowners insurance protects against damage from the unexpected, like a fire, a hurricane, hail, storms and earthquakes," says Holly Anderson, a spokeswoman for State Farm Insurance. "Most policies also cover living expenses for the homeowners if they are displaced while their home is repaired or rebuilt."

Remember to consider flood insurance

Griffin points out that flood insurance is separate from homeowners insurance policies, although many of the major home insurance providers administer this federal insurance program.

"An insurance agent will tell you if your home is in an area that requires flood insurance," says Griffin. "Once a buyer has identified a potential home to purchase, they should ask an insurance agent for an estimate of the cost of insurance coverage."

How much will home insurance cost you?

According to III, the average annual premium for home insurance in 2009 was $879.

Multiple factors affect the cost of homeowners insurance, including the location, condition and size of the home, along with the claims history. Consumers can request a "CLUE" report on a home they are considering buying in order to find out the types of claims and repairs required in the past.

"Many buyers find it confusing that the insurance value of the home is different from the amount they are paying to buy it," says Anderson. "Homeowners need to have insurance to cover the cost to rebuild the property, not the current market value. An appraiser or an insurance agent can help homeowners with an estimate of the cost to rebuild."

Griffin says that while the land underneath the home does not need to be insured, the cost to rebuild a residence is often higher than market value since it is based on construction costs.

"Insurance rates depend a lot on the risk factors that impact a particular home," says Griffin. "For example, a home next door to a fire department will carry less risk of extensive fire damage than a home in a rural area miles from the nearest fire department."

Homes located in hurricane-prone coastal areas or earthquake zones or communities frequently damaged by tornadoes are typically the most expensive to insure, but the age and condition of the home are also considered.

"If you buy a frame or siding home it may be more expensive to insure than brick because it will burn more easily," says Griffin, "but in an earthquake zone, brick homes are more costly to insure because they are less flexible."

Griffin says older homes are more expensive to insure because they may have suffered from a lack of maintenance.

"Home insurance is intended to protect homeowners from unforeseen circumstances, not a lack of upkeep," says Anderson. "For instance, if the roof falls into disrepair and causes damage to the interior of the home due to lack of maintenance, the insurance company is not likely to cover the homeowner's expenses."

Homeowners should budget for maintenance costs, which vary depending on the condition of the property. Financial experts recommend setting aside one percent of the home cost annually for maintenance.

"Every home buyer should have a home inspection to get a clear picture of home maintenance needs and costs," says Griffin.

4 ways to save on your homeowners insurance rates

To reduce your insurance costs, Anderson recommends:

  1. Shop around with three to five insurance companies.
  2. Ask an insurance agent if you are eligible for a reduced rate. Dozens of discounts are available for things like a security system.
  3. Bundle all your insurance needs with one company. Most offer multi-line discounts.
  4. Increase your deductible. Your premiums will be lower if you raise your deductible to $1000 from $500, for example.

Home insurance is one of the most important protections a homeowner can have, so all buyers should carefully choose their insurance coverage and insurance company.

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