What The Heck Is Homeowners Insurance?

The journey to homeownership is no easy trek. There will be an endless list of new terms and information that come up during the loan process, and even afterward. An important part of being a homeowner is knowing the ins and outs of homeowners insurance.

A standard homeowners insurance policy will provide you with financial protection in the event of a disaster or accident involving your home’s structure and belongings inside. Let’s look at some common questions about homeowners insurance and break it down together.

Is homeowners insurance required?

Technically, homeowners insurance is not required by law. However, most lenders will require you to have at least some form of basic insurance to fund a loan. Once you pay off your mortgage and you own the home outright, you don’t have to keep your insurance. But there are plenty of reasons to keep it.

What does homeowners insurance cover?

Your homeowner’s insurance will reimburse you for living expenses if you’re forced to live outside of your home during repairs, in addition to the home and personal property coverage. (Given the cause of damage is a covered peril in your policy.)

 

A named-peril policy will only cover the perils specifically outlined in your policy. An open peril policy will cover everything except the hazards specifically listed in your policy.

There are eight different forms of homeowners insurance, but there are five options for basic homeownership (not a condo or mobile home, etc):

HO1: Basic Form (Limited Coverage Policy)

This form of homeowners insurance offers the most limited coverage. Because it’s a named peril policy, only the perils outlined in your policy are covered. Perils:

Fire/Lightning

Windstorm/Hail

Vandalism

Malicious mischief

Vehicles

Aircraft

Explosions/Riots

Glass breakage

Smoke

Volcanic eruption

Personal liability

HO2: Broad Form (Basic Policy)

All perils listed under HO1 are included in this form, in addition to:

Falling objects

Weight of ice, snow, and sleet

Accidental discharge or overflow of water/steam

Sudden and accidental tearing apart, cracking, burning, bulging

Freezing

Sudden, accidental damage from artificially generated electrical current

HO3: Special Form (Most Common Policy)

This is considered the most common type of homeowners insurance because of its broad range of coverage, and the fact that it’s generally still affordable for homeowners. HO3 is an open peril policy. Some common exclusions you will see on an open peril policy include:

Earth Movement

Ordinance of law

Power failure

War

Nuclear hazard

Government action

More

HO5: Comprehensive Form

An HO5 policy will cover more perils than the previous types listed. Similar to an HO3, an HO5 is an open peril policy. Whereas an HO3 policy has named perils for personal property, HO5 policies are open peril for both the dwelling and personal property.

HO8: Older Home Form

This form of homeowners insurance is designed for homes built more than 40 years ago and don’t meet all of the structural update requirements found in HO3 policies. HO8 policies are peril plans that provide the same basic coverage as HO1 policies.

Most basic forms of homeowners insurance will not cover flood or earthquake damage. A standalone policy may be needed for your home if you live in areas prone to these types of damage.

How much does homeowners insurance cost?

The average premium for homeowners insurance in 2016 was about $100/month ($1,192 annually.) However, your cost will vary on location, provider, and extensiveness of the policy.

It’s important that you don’t confuse homeowners insurance and mortgage insurance. Homeowners insurance exists to protect the homeowner in the event of damage to your home. Whereas mortgage insurance exists to protect the lender in the event that you (the borrower) cannot repay your loan.

How do I buy homeowners insurance?

When it comes time to buy insurance, there are a few important steps you have to take before you go shopping. First, you’ll need to get a replacement cost estimate of your home from a certified appraiser. This estimate will help ensure you get the most from your insurance policy.

Next, you should take inventory of your personal items, including any valuables you may need coverage for. To understand just how much coverage you’ll need, combine your total assets.

It’s no secret that you should never go with the first company you find. So, take time to do your research, and ask people you know for recommendations. You should also get multiple quotes and check for possible discounts.

Are you ready to begin the homeownership journey? Contact Your Home Loan Experts, The Polder Group at Summit Funding.

 

Refinancing Before and After Divorce

Divorce rates across the United States have seen an 8% drop over the past ten years. However, the likelihood of divorce is still between 40-50% for American couples in their first marriage.

The thing to remember is no one gets married with the intention of getting divorced, but life happens. It’s important for you and your partner to be on the same page financially in case divorce were to ever become a reality.

Refinancing Before Divorce

Contrary to popular belief, if you were to split from your spouse, their name is not removed from the mortgage, even if the divorce decree awards the home (and the mortgage) to one spouse. In order to remove someone from the mortgage, you will usually need to refinance the mortgage with the spouse who will be in sole possession of the home.

If you and your soon-to-be ex-spouse are still on good speaking terms, refinancing before getting a divorce could be the best option for both of you.

Better Chance at Qualification

When you apply for a refinance as a joint couple, your finances reflect two salaries and two credit scores. Lenders will have more records to take into consideration when deciding whether or not to grant the loan.

Lock in a Low-Interest Rate

The Federal Reserve recently cut rates for the first time in ten years, so right now could be the best time to refinance. Sometimes a divorce will not finalize for a year or more, depending on the circumstances. As a couple, you may decide that a refi now would save you both thousands of dollars in the long-run.

Refinancing After Divorce

It’s important to remember that your ability to refinance will be based on a number of factors that might change after you get divorced. For example, your credit score will not be directly affected by the split, but there are circumstances that could cause your score to drop, which could also increase your interest rate.

Debt-to-Income Ratio

Lenders take your debt-to-income (DTI) ratio into consideration when approving you for a home loan. If you’re married, the salary of both you and your spouse are evaluated. Once your spouse’s salary is taken out of this equation, it might be more difficult for you to refinance.

Joint Accounts

There’s always a chance that you may be required to close joint credit accounts with your ex-spouse. As a result, this would lower your total available credit. You may also run into trouble if your former partner is unwilling to pay off balances due on joint accounts. This is where your credit score will begin to take a hit.

If most of your financial accounts were in another person’s name, you might also have a limited credit history.

Potential Benefits

Although your chances of qualifying for a refinance are potentially higher as a couple, there are still benefits to waiting until after your divorce is finalized to refi.

Your ex-spouse won’t be on the new mortgage

You will be in charge of your own financial decisions

Liquidity could be used to buy your former spouse out of their portion of the home

Because your home is likely the most valuable asset you and your spouse purchased together, it’s important to know what your options are before and after a divorce. Speak with your home loan experts today at The Polder Group, with Summit Funding to hold your hand through the process.