With mortgage interest rates at historic lows, many consumers are looking to take the plunge into homeownership, and with good reason. Over the long haul, purchasing a home is typically a good investment. However, the process of buying a house can be time-consuming, stressful and expensive. After sweating through negotiations over the price of the home, enduring the home inspection, forking over the down payment money and signing all the paperwork, the last thing most new homeowners want to think about is shelling out more cash for a homeowner's insurance policy.
But before you pass on this important product, take a look at these commonly asked questions about homeowner's insurance:
What does homeowner's insurance cover? In general, homeowner's insurance covers damage to your home caused by fire, theft and certain natural disasters. Depending on where you live, you may need to purchase additional coverage for insurance from floods and earthquakes, as these potentially devastating events are not covered in most basic policies. Homeowner's insurance also protects you from liability in the event someone is injured in your home.
When deciding whether to purchase a homeowner's insurance policy, keep in mind the policy can save you thousands, possibly millions, of dollars if your home is damaged or destroyed or someone attempts to sue you after being hurt in your home.
How much should I expect to pay for homeowner's insurance? As with most types of insurance, when you purchase homeowner's insurance you pay for the annual premium and decide on a deductible amount to be paid when you file an insurance claim. The average annual premium for a homeowner's insurance policy in 2010 (the most recent year of data) was around $900, according to the Insurance Information Institute. Usually, this is paid monthly as part of your mortgage payment.
Most insurance companies will let you to decide on a deductible amount you're comfortable with, but most homeowners choose an amount between $500 and $1,000.
Homeowner's insurance costs can vary greatly depending on where you live, how much coverage you choose to take on and your home's value.
How does homeowner's insurance work? If your home sustains damage that's covered by your homeowner's insurance policy, contact your insurance company right away to file a claim. After your claim is filed, the company will send out an adjuster to assess the damage. Based on the adjuster's notes, the insurance company will offer you a sum of money to repair the damage and settle the claim. You can try to negotiate this sum if you feel it's not enough to fix your home.
Additionally, filing too many claims – especially for minor homeowner losses – can backfire, since the cost of your policy may rise if you file more than two or three claims.
What's the difference between homeowner's insurance and a home warranty? Many realtors include a home warranty as a closing gift to clients, but be aware that a home warranty is not a substitute for homeowner's insurance. A home warranty covers the physical parts of your home, such as the refrigerator and air conditioning system, in the event one of those parts breaks down. Home warranties do not cover losses or damage due to theft or weather events, but homeowner's insurance does. Ideally, you'd have both a home warranty and homeowner's insurance, but if you can only afford one, homeowner's insurance is probably the way to go, as it offers more coverage.
Should I buy homeowner's insurance? If you're taking out a mortgage to purchase your home, the answer to this question is probably yes. Most lenders require homeowners to carry an insurance policy in case the home is damaged. Remember until you pay off your home loan, the lender is technically the owner of your home, and the company wants the property to be protected.
Neda Jafarzadeh is a financial analyst for NerdWallet, a financial literacy organization that helps consumers learn how to choose the best credit card, the right broker, find cheap car insurance and make smarter financial decisions overall.
Corrected on 07/15/2013: A previous version of this story misstated the premium for an insurance policy in 2010.