5 Tips to Save on Homeowners Insurance as a First-Time Homebuyer

With dozens of insurers to choose from and several factors to consider depending on where you live, first-time homebuyers may find it difficult to select the right homeowners insurance policy.

However, experts say that homeowners insurance is essential because it can help provide a financial safety net if the unexpected occurs. Homeowners insurance policies typically cover any destruction and damage to a home's interior or exterior, as well as the loss or theft of personal belongings and personal liability for any harm caused to others.

“The answer is yes if you're wondering whether homeowners insurance is a good investment,” says Amy Richardson, a certified financial planner with Schwab Intelligent Portfolios. “Because home ownership is inherently expensive, having an insurance policy for incidents protects your cash flow and keeps your funds free for future events that aren't home-related.”

The good news is that depending on the provider you choose and the area you're moving to, you may be able to customize your coverage in a variety of ways. If you are a first-time homebuyer and are unsure where to begin, here are some tips on how to select the best homeowners insurance policy for you.

Homeowners Insurance Costs for First-Time Homebuyers

According to the most recent Bankrate data, the average cost of a homeowners insurance policy in the United States is $1,312 per year, or about $109 per month, for a home with a dwelling coverage amount of $250,000, which represents a mid-range home.

“It is absolutely necessary protection, especially for first-time homebuyers. “In almost all cases, it will be a requirement as they go through the closing process,” says Bill Gatewood, corporate vice president at Burns & Wilcox, a Farmington Hills, Mich.-based insurance wholesaler. “The mortgage company wants to protect itself in case something bad happens to the house.”

However, policy rates are heavily influenced by the insurer's risk. For example, the more dangerous the area in which you live, the more you are likely to have to pay. For example, the average policy in Arkansas, which is particularly vulnerable to natural disasters such as hurricanes and tornadoes, costs $2,142 per year, but only $680 in Delaware.

The insurance company also evaluates the risk based on the property's past claim history, overall condition, and neighborhood. The value of your home also plays a significant role in determining your interest rate. A $150,000 home, for example, is typically much less expensive to insure than a $500,000 home because the replacement value is much lower.

Tips to Save Money on Insurance as a First-Time Homebuyer

Before purchasing homeowners insurance, first-time homebuyers should always compare prices. Almost every insurer offers different premium discounts and options, so it's worth spending a little extra time shopping around to find the policy that best fits your budget and coverage needs.

Tip 1: Shop for homeowners insurance early.

Begin looking for insurance and obtaining at least three to five quotes as soon as you sign the contract and have an address to provide to insurance providers. Don't settle for the first insurance company you come across or are referred to. Compare prices and coverages, as well as company reviews, to ensure you're getting the best coverage at the best price.

“If you can shop around, you'll be in a better financial position and have the right protection for your home,” says Richardson.

When you're shopping, make sure you're comparing policies from the same insurers. “The most common type of homeowners insurance is the HO-3 policy, which covers damage to your home and belongings from a variety of perils. “A good place to start is to compare premiums for HO-3 policies to ensure you're comparing apples to apples,” Richardson says.

Tip 2: Determine the Right Amount of Coverage for Your Home

It is critical to insure the home at replacement cost rather than market value. To determine the appropriate amount of coverage for your home, you must first determine how much it would cost to repair the property.

The best course of action is to contact your insurance company, which can accurately assess the property and its coverage requirements. Once the insurer has determined the cost of replacing your home, inquire as to how it arrived at that figure. Every insurer has a different estimate formula, and you'll want to make sure yours is correct.

It is also critical to understand the 80 percent rule. Insurers will only cover the cost of a house's damage if the owner has insurance coverage equal to or greater than 80% of the overall value of the house. You will be responsible for a portion of the damage costs if your insurance coverage is less than 80%.

Make sure your homeowners insurance covers at least 80% of the value of your home, but you should always aim for 100% coverage.

Tip 3: Understand What Won't Be Covered

Examine the policy for exclusions. Many homeowners insurance policies exclude certain types of damage, which frequently include natural disasters such as floods, mudslides, and earthquakes. If there are any exclusions from your policy that you would like to have, see if your insurance company will add on additional coverage. Some insurance, such as flood insurance, can be purchased separately.

Tip 4: Consider how much money you're willing to pay out of pocket.

Inquire with your insurer whether the policy's deductible is a fixed dollar amount or a percentage of the coverage amount. A deductible is the amount of money you must pay before the insurance company will pay your claim. You can reduce your monthly premiums by raising your deductible, but make sure you can afford it or have it in an emergency fund in case there is a claim.

“Take the highest deductible you can afford to pay out of pocket, and here's why: your homeowners policy is designed to cover large, catastrophic losses,” Gatewood advises. “The minimum deductible that people should take is $1,000, but going up to $2,500 or $5,000 can save you money.”

Tip 5: Consider Bundling Your Home and Auto Insurance

Depending on the insurance company, bundling a home and auto policy can save you anywhere from 10% to 25%. Homeowners should compare individual versus bundled policies when shopping for home insurance to see which is more cost effective. Other home insurance discounts, such as having a security system or certain smart home upgrades, can help you save money.

The Bottom Line

As a first-time homebuyer, the best way to ensure you get the best deal on homeowners insurance is to start shopping early, be as informed as possible, and always ask questions.