When you buy a new house, buying homeowners' insurance can help protect you from any financial loss associated with your home. If you use a mortgage to help purchase the house, you may be required by your lender to carry homeowners' insurance, as it helps protect the investment of the lender.
Lender Requires Insurance
If you want to use a mortgage to buy a house, the lender will typically make you buy homeowners' insurance to cover your house. This way, if the house is destroyed or damaged, the insurance can pay for the repairs or replacement and the lender's investment in the property will not be lost. Usually, you have to purchase the homeowners' insurance policy before you close on the house. The premium payment can also be included as part of your mortgage payment and then the mortgage lender can pay it for you annually.
How Much Insurance is Required?
When you buy a house with a mortgage, your lender may have specific requirements about how much insurance you have to carry on your home. Typically, this insurance requirement is expressed in a percentage of the value of the home. You may have to carry an insurance policy that is worth 100 percent of the mortgage balance. In some cases, the lender only requires you to carry a policy that covers 80 percent of the total value of the house.
In some cases, you may not mortgage your property, which would change your insurance requirements. For example, if you buy the house with cash or you simply pay off your mortgage over time, you are no longer required to carry homeowners' insurance. You could also change your policy to the bare minimum coverage without any extra coverage. While you do have this freedom, it typically does not make sense to get rid of your homeowners' insurance as your home is your largest asset and you want it protected.
Changing Coverage Limits
While you are in a house, the value of it can change. To make sure that you are protected from financial loss, you need to review your coverage limits from time to time to make sure that your current homeowners' insurance policy covers your house at all times. This may require you to increase the coverage limits.