Most mortgage lenders require that home buyers take out a homeowner’s insurance policy to protect the lender’s interest in case there’s a fire. It’s a good idea to shop for homeowner’s insurance soon after you enter into contract to buy a home.
Before you start shopping, find out if any claims were made against the property during the past five years. Your insurance agent should have access to a data bank that will give you this information. Or, ask the home sellers directly.
If the property has been subject to water damage claims within the past five years, you may have trouble finding an insurer for the property. Or, you may have to pay more for insurance than you anticipated.
The inclination is to go with the insurance company that quotes the most competitive premium price. Just make sure that you’re collecting and comparing quotes for comparable coverage.
It’s difficult to find Guaranteed Replacement Cost Coverage anymore. This type of insurance pays the entire cost to rebuild your home if it’s destroyed by fire, even if that cost exceeds the policy limit.
The standard coverage today is Limited Replacement Cost Coverage. This type of policy will only pay up to the policy limit. So, if your house costs $750,000 to rebuild, but it’s only insured for $500,000, this is all the insurance company will pay. With Limited Replacement Cost Coverage, it’s important that you carry adequate coverage, even if your insurance agent thinks you need less.
A preferable type of insurance for many homeowners is Limited Replacement Cost Coverage with an Addition Percent, which pays the replacement cost up to a specified amount (often 20 percent) over the policy limit.
For example, if you insure your house for $500,000 and it costs more to rebuild, the insurance company will pay up to $625,000, which is 120 percent of the policy limit. You still need to make sure you’re carrying adequate coverage, but there’s a margin for error built in.
HOUSE HUNTING TIP: Be on the look out for insurance agents who under-quote the premium by estimating low on the price per square foot to rebuild in your area. Costs to rebuild vary considerable from one area to the next. If you call the 800 number for an insurance company for information, you could end up getting a quote from an agent out of state where building costs are much lower.
Your real estate agent should be able to tell you an approximate price per square foot to rebuild in your area. The lender’s appraisal of the property should give you the number of square feet. Multiply the price per square foot to rebuild by the number of square feet to figure out how much coverage you need.
Unfortunately, some local insurance agents give a quote based on a low replacement cost in order to undercut their competitors. If you go with the low bidder, you may find at closing that you don’t have adequate coverage according to the lender’s requirements for funding the loan. This could delay the closing. Most lenders want the structure to be insured for the replacement cost value specified on the appraisal that was done for the lender.
One way to cut the premium costs is to take a larger deductible. For instance, for $500,000 of coverage there could be as much as $600 per year difference between a $1,000 and $5,000 deductible policy. Check with your lender to find out what size deductible is required. You may be able to increase the size of the deductible when you renew the policy one year after closing.
THE CLOSING: Most insurance companies offer a home alert discount if the home has a security system. And, discounts are offered if the home insurer also insures your car.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.