NextAdvisor is not a licensed insurance company, agency or broker and we do not sell, solicit or negotiate insurance. Our content provides summaries of insurance providers and/or products that may not include all terms, benefits or limitations of such provider or product. Please consult a licensed insurer or producer regarding any insurance product. Our site may include links that take you to another website and result in us earning a fee. However, our compensation is never tied to whether you purchase an insurance product. For more information, please see our Advertising Disclosure and How We Make Money.
With dozens of insurers to choose from and several factors to consider depending on where you live, the task of choosing the right homeowners insurance policy can be daunting for first-time homebuyers.
But experts say homeowners insurance is critical to have, since it can help provide a financial safety net if the unexpected occurs. Homeowners insurance policies generally cover any destruction and damage to a home’s interior or exterior, the loss or theft of possessions, and personal liability for any harm to others.
“If you’re asking yourself whether homeowners insurance is a good investment, the answer is yes,” says Amy Richardson, a certified financial planner with Schwab Intelligent Portfolios. “Homeownership by nature is costly, so having an insurance policy for incidents helps protect your cash flow and keeps your funds freed up for future events that aren’t home-related.”
The good news is that there are many different ways you might be able to customize your coverage based on the provider you choose and area you’re moving to. If you’re a first-time homebuyer and not sure where to start, here are some pointers on how to choose the best homeowners insurance policy for you.
The Cost of Homeowners Insurance for First-Time Homebuyers
The average cost of a homeowners insurance policy in the United States is $1,312 annually, or about $109 monthly, based on a home with a dwelling coverage amount of $250,000, which represents a mid-range home, according to the latest Bankrate data.
“It’s absolutely a protection that’s necessary, particularly for first-time homebuyers. In almost all cases, it’s going to be a requirement as they go through the closing process,” says Bill Gatewood, corporate vice president at Burns & Wilcox, an insurance wholesaler based in Farmington Hills, Mich. “The mortgage company wants to protect itself in the event that something catastrophic happens to the house.”
But policy rates are largely determined by the insurer’s risk. For instance, the more hazardous the area you live in, the more you are likely to have to pay. For example, the average policy costs $2,142 per year in Arkansas, which is especially at risk for natural disasters like hurricanes and tornadoes, but just $680 in Delaware.
The insurance company also assesses the risk based on past claim history associated with the property itself, its overall condition, and neighborhood. Home value plays a big role in determining your rate, too. For example, a $150,000 home is typically much cheaper to insure, since the replacement value is much lower, than one worth $500,000.
Tips to Save Money on Insurance as a First-Time Homebuyer
First-time homebuyers should always do a price comparison before buying homeowners insurance. Just about every insurer offers different discounts and options for premiums, so it’s worth spending a bit of extra time shopping around to find the policy that matches your budget and your coverage needs.
Tip 1: Shop Early for Homeowners Insurance
As soon as you sign the contract and have an address to give to insurance providers, start looking for insurance and get at least three to five quotes. Don’t just go with the first insurance company you happen across or get referred to. Compare prices and coverages, and look at company reviews to make sure you’re getting the best coverage for the best rate.
“If you can shop around, that’s going to put you in a better place financially and give you the right protection for your home,” says Richardson.
When you’re shopping, make sure you’re comparing the same types of policies from different insurers. “The common form of homeowners insurance is the HO-3 policy, and that covers damage to your home and belongings from many different perils. A great way to start is by comparing the premiums for HO-3 policies to make sure you’re comparing apples to apples,” Richardson says.
Tip 2: Determine the Right Amount of Coverage for Your Home
It’s critical to insure the home at its replacement cost, not market value. To figure out the right amount of coverage for your home, you’ll need to know how much it would cost you to repair the property.
The best thing to do is talk to your insurance company, since it can accurately assess the property and its coverage needs. Once the insurer figures out the cost of replacing your home, ask how it arrived at that number. All insurers have different formulas for estimates, and you’ll want to make sure yours is accurate.
It’s also important to be aware of the 80% rule. Insurers will only cover the cost of a house’s damage if the owner has insurance cover equaling 80% or more of the house’s overall value. If your insurance coverage is less than 80%, you’ll be responsible for a portion of the damage costs.
Make sure your homeowners insurance covers at least 80% of the home’s value, but you should always strive for 100% coverage.
Tip 3: Know What Won’t Be Covered
Check for exclusions in policies. Many homeowners insurance policies list certain types of damage that they won’t cover, which often includes natural disasters like floods, mudslides, and earthquakes. If there are any exclusions that you would prefer to have on your policy, see if your insurance will add on additional coverage. Some types of insurance, like flood insurance, can be purchased separately.
Tip 4: Weigh How Much You’re Willing to Pay Out of Pocket
Ask your insurer whether the policy’s deductible is a fixed dollar amount or a percentage of the amount of your coverage. A deductible is the amount of money you’re responsible for when you file claims before the insurance company pays. You can lower your monthly premiums by increasing your deductible, but you’ll want to make sure you can come up with that amount or have it in an emergency fund in case there’s a claim.
Avoid filing claims for minor problems or damage in your home. If the cost to repair the damage is small or close to your deductible amount, then consider paying out of pocket instead. The increased deductible and a potentially higher rate could ultimately cost you more.
“Take the biggest deductible you can afford to pay out of pocket, and here’s the reason why: your homeowners policy is meant to cover large, catastrophic losses,” says Gatewood. “The minimum deductible people should take is $1,000, but you can save money if you go up to $2,500 or $5,000.”
Tip 5: Consider Bundling Your Home and Auto Insurance
Bundling a home and auto policy can save you anywhere from 10% to 25%, depending on the insurance company. When shopping for home insurance, homeowners should compare individual versus bundled policies to determine which is more cost effective. Other home insurance discounts, such as having a security system or certain smart home upgrades, can also lower your premiums.
The Bottom Line
The best way to make sure you’re getting the best deal on homeowners insurance as a first-time homebuyer is to start shopping early, be as informed as possible, and always ask questions.