Insuring your home
Another step you must take to protect your investment is to obtain homeowner's insurance. Because your property is the security for your mortgage loan, your lender wants to be sure the value of the home is protected in case it is damaged or destroyed. Contact your insurance agent to secure an insurance binder.
In some cases, lenders will escrow money from your mortgage payment each month to cover the annual renewal of your homeowner's insurance premium. However, if your lender does not set aside money to renew your homeowner's insurance, you will have to budget and save for it on your own.
Typically, homeowner's policies cover you for damages or losses caused by things like theft, fire, vandalism or wind. But if you also want to be covered for other disasters, such as floods or earthquakes, you may have to purchase extended coverage.
Keep in mind, that your homeowner's insurance does not cover normal wear and tear. This is considered general maintenance and is something that you must save for in your budget.
- Replacement coverage. Another consideration when you buy homeowner's insurance is whether you want replacement coverage for your home and its contents. This may cost more, but if you have a loss, you will be paid enough to replace whatever is damaged or destroyed. Without replacement coverage, the insurance company will take into consideration the age and condition of the damaged property and pay you only its fair market value. This means that, if your five-year-old television set is stolen, the insurance company will pay you its depreciated value — not what it would cost you to buy a new television set to replace it.
- Liability insurance. Your homeowner's policy also provides another important type of protection called liability insurance. This means, if someone is injured on your property, you could file a claim under your homeowner's policy to cover medical and related expenses. When you purchase homeowner's insurance, you can choose the amount of liability coverage you need, much the same as you do with your auto insurance.
