If you’re buying a home, refinancing, or about to pay off your mortgage, you’ve probably wondered if you need homeowners insurance. In most instances, your mortgage lender will require you to have homeowners insurance coverage. But are there situations where it’s not necessary?
In this article, we’ll answer questions and cover:
- Why having homeowners insurance is always worth it - and often required.
- How do I get homeowners insurance?
- What’s covered on a homeowners insurance policy?
- How much should I insure my home for?
- Will my deductible go up?
Why having homeowners insurance is always worth it - and often required.
There’s a reason why only in very rare instances you’ll find a homeowner without insurance coverage. However, wondering if you need to be covered or if it’s legally required isn’t out of the ordinary.
If you have any mortgage on your home, you are required to have homeowners insurance. If you do not have a mortgage, technically, you don’t need homeowners insurance. Although you won’t be fined, no professional in the industry would advise this. If there is ever an unexpected catastrophic event, homeowners insurance makes sure you are not financially liable for the entire loss.
Your mortgage lender requires you to be covered by homeowners insurance in order to be approved for your loan, because homeowners insurance is essentially an insurance policy for both you and your lender. The policy ensures if something would happen to your home, you’ll still have somewhere to live and you’ll still be able to pay back your mortgage because you aren’t paying 100% out of pocket to fix the damages. In addition, your mortgage lender will forcibly place homeowners insurance on your loan if you do not maintain your homeowners insurance policy.
If you’re refinancing your home, mortgage lenders require you to have coverage extending for two months after the closing date. This is a requirement of Fannie Mae.
If you’ve paid off your home or are about to, you’ve invested a large amount of money into a valuable asset. Although it’s not legally required, homeowners insurance will protect your investment in case something happens to your home.
What’s covered on a homeowners insurance policy?
A long list of items can be covered by homeowners insurance. Typically, these categories of coverage are broken down into dwelling, other structures, personal property, and liability coverage - this infographic by Allstate is a great reference tool. Here is a quick breakdown of each category and what’s typically covered:
- Dwelling coverage (the structure of your home)
- Your policy pays to repair or rebuild your home in the event it’s damaged or destroyed by fire, hurricane, hail, lightning, or other disasters.
- A standard policy will not include coverage for flooding, earthquakes, or routine wear and tear.
- Other structures coverage
- Most policies will also cover other detached structures such as a garage or shed and even a fence.
- Personal property coverage
- Most policies cover a portion of your belongings in the event of a loss, which may include clothing, electronics, and furniture. The policy would help repair or replace the belongings.
- If you have expensive items such as jewelry, art, or collectibles, they are typically covered. However, you will want to make sure they are insured at the full value by purchasing a personal property endorsement floater, as explained by the Insurance Information Institute.
- Liability coverage
- Most policies include liability coverage in the event someone is injured on your property who does not live in the home.
- The policy will pay for the costs of defending yourself in court and court awards.
- You can upgrade this policy to include more if you feel the basic coverage isn’t enough, such as adding no-fault medical coverage or going with an umbrella policy.
In addition, there are often differences between what’s covered on a condo and a single-family home. The big difference is a condo just has building coverage from the drywall to the inside of the home while they have a Condo Association that protects from the drywall to the outside of the home. A single family homeowners policy covers inside and out. Every other coverage that can be purchased is the same for condo and homeowners policies.
How much should I insure my home for?
Derek Martin, the owner of Goosehead Insurance in Chicago, says this is the number one question he hears from his clients.
“Client’s want to know what’s the difference between the market value of their home and how much they should insure their home for,” says Martin. “From an insurance perspective, understanding that we are not insuring the land is very important. We want to make sure in the event of a total loss, you will have enough coverage on your home to rebuild just like it was before.”
Martin explains that your insurance company doesn’t repurchase the land. Instead, it all comes down to the structure itself. You should insure your home for enough to rebuild the home.
How do I get homeowners insurance?
You can shop around for homeowners insurance and request quotes to make sure you’re getting the best plan and price. If you already have a company handling your car insurance, you may be able to save money by bundling your different insurance plans into one package.
If you need recommendations, your mortgage lender will be able to pass along information for insurance agents they regularly work with.
When you’re buying a home and your appraisal and title are approved, you should order your homeowners insurance policy at that time. The effective date of your policy will be the same date of your closing.
Will my deductible go up?
Many homeowners are under the impression their insurance agency may raise their deductible at any time. But this isn’t true.
“Deductible should always stay the same unless the insurance company raises their minimum deductible on you,” says Martin. “This doesn’t happen very often. If it does, it will take effect on the renewal date of your policy. It can’t just occur at any moment.”
Last items to note and more information.
Keep in mind - when purchasing a home, you will prepay a 12-month policy at the time of the closing. If you cancel your homeowners insurance within the first 12 months or if you don’t renew your policy, your mortgage lender will force place a policy on your home until your mortgage is paid off.
If you're just starting your home ownership journey, make sure to download our free First-time Home Buyer Guide to walk you through the process!