Homeowner Insurance

Another cost you’ll want to factor into your decision to buy a home is insurance. There are three types to consider: homeowners insurance, flood insurance, and mortgage insurance. Homeowners insurance is required, though you will have some options to choose from; but flood or mortgage insurance may or may not be required depending on your property and lender.

All lenders require homeowners insurance, which is typically included in your monthly mortgage payment. Your lender will hold a portion of the payment designated for insurance in an escrow account. An insurance estimate will be included on the first page of the “Loan Estimate,” under the Estimated Payments section. If you do not purchase homeowners insurance, your lender is allowed to purchase on your behalf with advance notice; keep in mind it may be more expensive than a policy you could purchase on your own.

Homeowners insurance is a package policy and covers the following: structure of the home if damaged; personal belongings if damaged or stolen; liability protection in the case of a lawsuit for bodily injury or property damage; and living expenses in the case the home is rendered uninhabitable due to damage.

While the homeowners insurance package is standardized, there are options based on your type of home, as well different coverage levels. Most homeowners purchase an HO-3 policy that costs an average of $2,100 per year, and homeowners with renters can add an endorsement for risks associated with renting to tenants. The HO-6 policy is standard for owners of condos or co-ops and costs an average $700 per year.

There are three levels of coverage: (1) actual cash value, which pays for replacement minus a deduction for depreciation; (2) replacement cost, which pays for replacement, and no deduction; (3) and guaranteed replacement, which provides the highest level of protection to account for increases in construction costs and pays to replace or rebuild as it was — even if the cost exceeds your policy limit.

Damage from most natural disasters, including fire, hurricane, hail, lightning is covered. The following are NOT covered and require purchasing an additional policy: flooding, earthquakes, and damage from poor maintenance.

Flood insurance, a separate purchase, is standardized through the National Flood Insurance Program by Congress, and is sold by private insurance companies. A full explanation of flood insurance is available on FloodHelpNY.org, a website supported by the Center. You can use the site’s tools to look up your flood zone and estimate your potential insurance rate.

Another consideration, mortgage insurance, protects your lender, not you, in the event you fall behind on your payments, lowering the potential risk to the lender and allowing you to qualify for certain mortgages. Mortgage insurance is generally required by lenders for down payments less than 20% of the purchase price, as well as by FHA and USDA loans. You can read more about mortgage insurance and typical terms here.