By Dian Hymer
Buying a home is the biggest investments most people make in their lifetimes. Consequently, most homebuyers purchase insurance before closing on a new home for security and peace of mind. Even if you're not risk-adverse, your lender will have various insurance requirements.
Before a lender will issue the mortgage funds to close on a home purchase, a policy of title insurance is usually required which guarantees the lender's interest in the property. The buyer usually pays for the lender's title policy. But, the lender's policy won't protect the buyer's interest in the property.
Buyers should obtain their own policy of title insurance. Who pays for the buyer's title insurance is usually negotiable between the buyer and seller, and is often set by local custom. Title insurance is paid for on a one-time only basis, and it's not transferable.
The cost of a policy of title insurance is based on the purchase price: the higher the price, the higher the insurance premium. If the sellers purchased or refinanced the property recently, you may qualify for a discounted premium rate (called a short rate).
In addition to title insurance, the lender will require that you have a hazard insurance policy to cover the property against perils such as fire. Most buyers take out a comprehensive homeowner's insurance policy that covers such things as personal possessions, liability, vandalism, theft, water damage (but, not flooding), and loss of the use of the dwelling. If the property is located in a flood zone, the lender will want you to carry flood insurance.
Unlike title insurance, homeowner's insurance is paid for on an ongoing basis. Typically, the lender will require that you pay one year's premium in advance at closing. Thereafter, you can pay premiums on whatever payment schedule you work out with your insurer (quarterly, monthly, etc.).
The cost of homeowner's insurance varies from one company to the next, and from location to location. There are various kinds of coverage. So when you're shopping for insurance, be sure that you are comparing similar kinds of coverage.
The Cadillac of homeowner's insurance policies is a guaranteed replacement cost policy. This will pay to rebuild your home even if the cost to rebuild exceeds your policy limit. This type of coverage, which was commonly available a decade ago, is now difficult to find. Some companies will only pay out on a claim up to the policy limit. Others will pay up to 120 or 125 percent of the policy limit.
First Time Tip: Insurance agents will quote you a rate based on the estimated cost to rebuild. They'll need to know the square footage of the home. This information is on the appraisal report of the property that was prepared for your lender. Be sure to ask for a copy of the appraisal. The insurance agent will also want to know the general condition of the home, and what upgrades have been done to plumbing and electrical systems.
To arrive at an estimated cost to rebuild, the insurance agent multiplies a per-square-foot cost to rebuild by the number of square feet in the home. Make sure that the cost per square foot estimate is accurate by checking with a local home building contractor. Some insurance agents estimate low in an effort to save you money on your insurance premium (the lower the cost to rebuild, the lower your insurance premium).
The Closing: While this may be well-intentioned, you could suffer the consequences if your home burns down and it costs way more than your coverage to rebuild.
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