Homeowner’s Insurance: What Every Buyer Needs to Know
Homeowner’s insurance is a required part of the home buying process—your mortgage lender will insist on it—but it’s also a critical financial protection you’d want even if it weren’t required. Understanding homeowner’s insurance coverage types, costs, and options helps you choose the right policy and avoid gaps that could leave you financially exposed.
What Does Homeowner’s Insurance Cover?
A standard homeowner’s insurance policy (known as an HO-3 policy) includes several types of coverage bundled together.
Dwelling coverage pays to repair or rebuild your home if it’s damaged by a covered peril such as fire, windstorm, hail, lightning, or vandalism. This coverage should equal the cost to completely rebuild your home—not its market value or purchase price, which includes the land.
Other structures coverage protects detached structures on your property like garages, fences, sheds, and guest houses. It’s typically set at 10% of your dwelling coverage amount.
Personal property coverage reimburses you for belongings damaged or destroyed by covered events. Standard policies cover personal property at actual cash value (replacement cost minus depreciation), while upgrade policies cover replacement cost (what it costs to buy a new equivalent). Replacement cost coverage is worth the small additional premium.
Liability coverage protects you if someone is injured on your property and you’re found legally responsible. It also covers damage you or family members cause to others’ property. Standard liability limits of $100,000 to $300,000 are included, but many experts recommend increasing to $500,000 or purchasing an umbrella policy for additional protection.
Loss of use coverage pays for temporary living expenses—hotel, meals, additional commuting costs—if your home becomes uninhabitable due to a covered event. This typically covers up to 20% of your dwelling coverage amount.
What Homeowner’s Insurance Doesn’t Cover
Standard policies have notable exclusions that catch many homeowners off guard. Flooding is excluded from standard policies. If you’re in a flood-prone area—or even if you’re not—consider purchasing separate flood insurance through the National Flood Insurance Program (NFIP) or a private insurer. Earthquakes require a separate policy or endorsement. Sewer backup and water damage from gradual leaks may not be covered. Certain dog breeds may be excluded from liability coverage. Home-based business equipment and liability may need separate coverage. Mold, termites, and normal wear and tear are typically excluded.
Review your policy’s exclusions carefully and purchase additional coverage for risks relevant to your location and circumstances. Your insurance agent can identify coverage gaps specific to your situation.
How Much Does Homeowner’s Insurance Cost?
Average annual premiums vary significantly by location, home value, construction type, and coverage levels. National averages range from $1,500 to $3,500 per year, but your specific premium depends on many factors including your home’s location and proximity to fire stations and coastlines, the home’s age, size, and construction materials, your claims history and credit score, the coverage amounts and deductible you choose, and local risk factors like weather, crime rates, and natural disaster exposure.
Homes in hurricane-prone coastal areas or wildfire zones may face significantly higher premiums. Factor insurance costs into your budget when calculating how much house you can afford.
Tips for Saving on Homeowner’s Insurance
Shop multiple insurers. Rates for identical coverage can vary by hundreds of dollars between companies. Get quotes from at least three to five insurers.
Bundle policies. Purchasing your homeowner’s and auto insurance from the same company often qualifies you for a multi-policy discount of 5% to 15%.
Increase your deductible. Raising your deductible from $500 to $1,000 or $2,500 can reduce your premium by 15% to 25%. Just make sure you can afford the higher deductible if you need to file a claim.
Improve your home’s safety. Security systems, smoke detectors, deadbolt locks, and storm shutters can qualify you for premium discounts. Some insurers also offer discounts for newer roofs and updated electrical and plumbing systems.
Maintain good credit. In most states, insurers use credit-based insurance scores in pricing. Maintaining good credit helps keep your premiums lower.
When to Review Your Coverage
Review your homeowner’s insurance annually and after any major changes—renovations that increase your home’s value, significant purchases of jewelry or electronics, changes in family situation, or shifts in local risk factors. The escrow account that manages your insurance and tax payments is analyzed annually as well; learn how this works in our escrow account guide.
Get the Right Coverage from Day One
Having proper homeowner’s insurance in place before closing is a requirement of the home buying process. Start shopping for insurance as soon as you go under contract to ensure you have adequate coverage at a competitive price.
Work with an agent from NearbyRealtors who can recommend trusted insurance professionals in your area and help you understand the coverage needs specific to the homes you’re considering.