What Is Homeowner’s Insurance and What Does It Cover?

This article originally appeared on the RE/MAX Results Blog, and can be viewed in its original context here.

Whether you’re shopping for your first home or looking for your next one, having the proper homeowner’s insurance coverage is crucial. But the question many new homebuyers have is: what exactly is homeowner’s insurance?

Private Residence Coverage

Homeowner’s insurance (HOI), also known as home insurance or property insurance, is insurance coverage for a private residence that combines a variety of protections. It is designed to protect against damages to the home itself (the interior and exterior), possessions within the home, and to provide liability coverage against accidents on the property.

Currently in the United States there are seven standard forms of home insurance ranging from HO-1 to HO-8, and each level has varying degrees of protection based on the homeowner’s needs.

Homeowner’s insurance coverage needs are based on a variety of factors, and one in particular is location. For example, if someone lives in an area of the country that is prone to earthquakes or hurricanes, adding policies that cover those natural disasters would be a good move.

Other forms of insurance such as renter’s insurance, designed for renters, only cover the possessions of the renter and certain events that are not covered in the home insurance held by the property owner.

What Does Homeowner’s Insurance Cover?

The standard homeowner’s insurance policies include four essential coverage types:

• Coverage for the structure of your house
• Coverage for your personal belongings
• Liability protection
• Additional living expenses in the case of an insured disaster
• Structure of Your House

If your home is destroyed or damaged due to a fire, hurricane, hail, lightning or other disasters listed in your policy, your home insurance will pay to rebuild or repair your home.

Personal Belongings

The typical coverage on your personal belongings (clothes, furniture, electronics, etc) is usually based on a home inventory that you conduct yourself. Your items are covered in case of fire, theft, or other insured instances.

Liability

Liability coverage is put in place to cover potential claims stemming from accidents on your property, such as slipping on an icy sidewalk. This includes lawsuits and damages as well.

Additional Living Expenses (ALE)

ALE covers the additional living costs that accrue from an insured accident or disaster. This includes all bills over your typical living expenses, such as hotel fees, that accumulate while you cannot live in your home.

Keep in mind that every home insurance policy is different, will have varying levels of coverage, and should be carefully considered based on your needs. Working with a qualified insurance agent will ensure you find the policy you need to cover your home and belongings in the most cost effective way. Contact your RE/MAX Results agents today for some local recommendations.

How Do Homeowners Accumulate Wealth?

The differences between buying and renting are massive. According to the Federal Reserve, a typical homeowner’s net worth was $195,400, while that of renter’s was $5,400. The data reflects 2013 and the next survey of household finances, which is conducted every three years, will be out in 2016. Based on what has happened since 2013 and projecting a conservative assumption of what could happen next year to home prices if we see only 3% price growth, the wealth gap between homeowners and renters will widen even further. The Fed is likely to show a figure of $225,000 to $230,000 in median net worth for homeowners in 2016 and around $5,000 for renters. That is, a typical homeowner will be ahead of a typical renter by a multiple of 45 on a lifetime financial achievement scale.

Though there will always be discussion about whether to buy or rent, or whether the stock market offers a bigger return than real estate, the reality is that homeowners steadily build wealth. The simplest math shouldn’t be overlooked. A vast majority of homebuyers take out a 30-year fixed rate mortgage to make a home purchase. After 30 years, there is no mortgage payment (nor rent payment). So the home price growth over that time period would be the equity that the homebuyer would have accumulated. For example, the median home price of a single-family dwelling in the U.S. thirty years ago in 1985 was $75,500. This year, it will be at least $220,000. That figure of $220,000 is the housing component of the person’s wealth. Even had home prices not risen, the person would still have $75,500 in wealth today – on top of not paying any further monthly mortgage after 30 years.

This simple example does not play out nearly as neatly in the real world, since people do not stay in one residence over the 30 year period. Almost all homeowners trade up, change neighborhoods, or move to a better school district at some point. However, they are able to make those residential relocations due to the housing equity accumulated, even over a shorter period, and can immediately apply that equity to the next home as a downpayment. Therefore the conditions of steadily building housing wealth still hold.

We also know that not everyone can or should be homeowners. The memories of easily accessible subprime mortgages and subsequent harsh foreclosure pains are still fresh, and remind us of the devastating impact on the families involved, local communities, and to the broad economy. In addition most young adults have not developed the financial standing or have found a stable, desirable career and, therefore, choose not be homeowners until later. The homeownership rate among households under the age of 35 is 35% currently and rarely rises above 40% historically. For those under the age of 25, the current ownership rate is 23% and rarely rises above 25%. But the time will eventually come when people want to convert to ownership. By the time people are in their prime-earning years of 45-to-55, nearly three-fourths do eventually become homeowners. By retirement, nearly 80% are homeowners.
A recent survey of consumers commissioned by my organization revealed that 80% believe that purchasing a home is a good financial decision (2015 National Housing Pulse Survey). Most consumers appear to already understand the simple math and the benefits of homeownership. So don’t overthink the matter of whether now is a good time to buy, or whether stock market returns will be better. The exact timing of a home purchase will have little financial impact in the big scheme of things. Just know that homeowners generally do come out ahead of renters in the long run.

This article was written by Lawrence Yun and originally appeared on the Forbes Website on October 14, 2015. The article can be viewed in its entirety here.

Home Buyer Seminars are in full swing! Conducted one for Thomson Reuters yesterday! St. Kates and Hamline in March! Now is the time to buy while interest rates are low and housing prices are reasonable (they are on the rise)!

NEXT SCHEDULED HOME BUYERS SEMINAR:

When:

Saturday March 7th, 2015  10:00-11:30am

Where:

St. Catherine’s University

Mendel Hall, Room 101

2004 Randalph Avenue

Saint Paul, MN 55105

CLICK HERE TO REGISTER FOR CLASS

There are many loan options available to borrowers who have experienced short sale, deed-in-lieu of foreclosure, foreclosure or bankruptcy. Below is a summary of the current waiting periods.

Click Here to see the Printable “Waiting Period” Loan Graph

* Multiple loan options are available. Specific eligibility criteria may apply depending on product chosen
**Property surrendered in a bankruptcy, is continued as a deed-in-lieu

Definitions Used in this Article:

Foreclosure- Property is repossessed when the borrower consistently fails to satisfy the loan obligations as agreed.

Short Sale- Lender agrees to accept payoff of less than amount owed in the mortgage once the property is sold.

Deed-in-Lieu of Foreclosure- Failing to satisfy the loan obligation, the borrower comes to an agreement with the lender to assign the mortgage title to the lender and avoid foreclosure proceedings.

Bankruptcy Chapter 7- Assets are liquidated and used to pay debts. Remaining bankruptcy debts are discharged.

Bankruptcy Chapter 13- Debts are paid back on a scheduled payment plan agreed upon and confirmed by the court.

Extenuating Circumstances- There are non-recurring events that are beyond the borrower’s control, that result in sudden, significant and prolonged reduction in income or catastrophic increase in financial obligations. Example of extenuating circumstances might include the serious illness or death of the primary wage earner. Divorce or the inability to sell the home because of a job transfer or relocation, does not qualify as an extenuating circumstance.