Most lenders will require you to have insurance in order to lend you the money to make the purchase. In many cases, the lender will include your annual insurance premium as a part of your monthly mortgage payment. In these scenarios, the portion of your monthly payment attributed to insurance will be placed in an escrow account to pay your insurance premium, either quarterly, semi-annually or annually.
While the there are various types of homeowners insurance, most lenders will require you to get an insurance policy that covers the structure of the home and your possessions. In most cases, you will get a named perils policy. This type of policy covers losses that are due to those specific perils listed in the policy. The typical perils covered include fire, windstorm, hail, some other physical damages and theft. Some policies will cover even more than those listed. You may have to get a separate policy to cover floods and other disasters.
What You Are Required To Pay
In addition to the cost of your annual policy premium, most policies will include a deductible. The deductible is the initial amount you will pay for damage before the insurance company pays their portion. For example, if you had a small kitchen fire which resulted in $10,000 in damages and your deductible was $1,000, you would have to pay that before the insurance company will pay the other $9,000.
Deductibles can very greatly from one policy to another, it all depends on your specific policy arrangements. Usually, if you pay a higher premium your deductible will be lower. For example, you may pay $2,000 annually to insure a $200,000 home. At this rate, let's assume your deductible is $1,000. If you wanted a $500 deductible, you may be able to get that if you agree to increase your annual premium to $2,200.
How Much Coverage You Will Need
Most lenders will require that you insure the home for at least 80 percent of its replacement value. The replacement value determines in today's dollars what it would cost to rebuild your home. While some insurance companies only require you to cover 80 percent of the value, it would be better to cover 100 percent of the value of the home. While that will be a little more expensive, in the event you did have to replace your home, you would not be looking at any out of pocket expenses to do so.
When considering how much to replace, keep in mind that you would want enough insurance to cover your home as is, which includes size, style, features, architectural details and possessions. Some policies will simply build you a new home but ignore the features and even full size of your old home.
Inventory Your Home
You should take lots of pictures of your home, both inside and outside. These pictures should include the structure and style of the home. In addition, you should take pictures of all of your possessions and organize them by room. While there are software programs to help you do this, a simple three-ring binder will do. The goal is to take a picture of the item, list what you paid for it and what you perceive the value to be now. These pictures will help insurance adjusters in the event of a disaster. One final note: you should keep this information in either a fire safe or some other place outside of the house.