
Homeowners insurance. It’s essential, required with a mortgage, but how much do you truly understand beyond the basics? What’s actually covered, what isn’t, which policy types exist, and how do you determine adequate protection? And what happens when facing storm damage, or even something devastating like fire damage? Without proper knowledge, you might be overpaying while remaining underprotected. At Electrum Properties, we’re committed to empowering homeowners with practical information that creates win-win solutions, so we’ve developed this comprehensive homeowners insurance guide for home buyers in Lubbock.
Homeowners Insurance Overview
Homeowner’s insurance functions as your financial safety net. It will “compensate you if an event covered under your policy damages or destroys your home or personal items. It will also cover you in certain instances if you injure someone else or cause property damage.”
This vital insurance provides three fundamental protections…
- “Repair your house, yard and other structures.
- Repair or replace your personal belongings.
- Cover personal liability if you’re held legally responsible for damage or injury to someone else.”
Homeowner’s insurance delivers three core coverage levels – actual cash value, replacement cost, and extended replacement cost/value. Importantly, “[p]olicy rates are largely determined by the insurer’s risk that you’ll file a claim.” This risk assessment evaluates “past claim history associated with the home, the neighborhood, and the home’s condition.”
Types of Policies
Several types of homeowner’s insurance (also called “policy forms”) exist, each offering different protection levels. The most common policy types include…
HO-1 AND HO-2
These less popular policies provide basic coverage and “payout only for damage caused by issues listed in the policy. Together these two types account for about 8% of homeowners coverage. HO-2 insurance, the more common of the two, typically covers your house and belongings only for the 16 [listed] causes . . . HO-1, which isn’t widely available, is the most bare-bones type of homeowners insurance. It covers losses from an even shorter list of perils than the HO-2 form.”
HO-3
“HO-3 insurance policies, also called ‘special form,’ are by far the most common,” representing nearly 80% of coverage for owner-occupied homes. “If you have a mortgage, your lender is likely to require at least this level of coverage. HO-3 insurance policies generally cover damage to your home from any cause except those the policy specifically excludes, such as an earthquake or flood. However, where it concerns your belongings, an HO-3 policy typically covers only damage from 16 ‘named perils’ unless you buy extra coverage.”
HO-5
Known as comprehensive form or premier coverage, this policy type provides the most extensive protection. “It pays for damage to your home and belongings from all causes except those the policy excludes by name. . . . It’s typically available only for well-maintained homes in low-risk areas, and not all insurers offer it.”
Replacement Cost, Actual Cash Value, and More
It’s crucial to understand that “[i]f your home is destroyed, your homeowner’s insurance company isn’t likely to simply write you a check for the amount listed on your policy. Your payout could differ depending on the cost to rebuild and the coverage you chose – and much of it will be paid directly to contractors rebuilding your home, in many cases.”
When selecting your coverage, consider these essential factors:
REPLACEMENT COST
This coverage pays whatever amount is necessary to rebuild your home (potentially exceeding your policy limits). “This situation may arise, for instance, if construction costs have increased in your area while your coverage has remained level.”
ACTUAL CASH VALUE
“Actual cash value coverage pays the cost to repair or replace your damaged property, minus a deduction for depreciation. Most policies don’t use this method for the house itself, but it’s common for personal belongings.”
FUNCTIONAL REPLACEMENT COST VALUE
This coverage will pay to repair damage to your home, but potentially using more affordable materials than the original. For instance, damaged plaster walls might be replaced with less expensive drywall.
REPLACEMENTCOST VALUE
“Replacement cost value coverage pays to repair your home with materials of ‘like kind and quality,’ so plaster walls can be replaced with plaster. However, the payout won’t exceed your policy’s dwelling coverage limits.”
EXTENDED REPLACEMENT COST VALUE
This coverage “will pay out more than the face value of your dwelling coverage, up to a specified limit, if that’s what it takes to fix your home.” The limit is typically expressed as a percentage or dollar amount, providing “a cushion if rebuilding is more expensive than you expected.”
Guaranteed Replacement Cost Value
“Guaranteed replacement cost value coverage pays the full cost to repair or replace your home after a covered loss, even if it exceeds your policy limits.” However, not all insurance companies offer this premium level of protection.
Determining Amount of Coverage Needed
Determining exactly how much homeowner’s insurance coverage you need is vital. You’ll need adequate protection to rebuild or repair your home if it’s destroyed or severely damaged. To estimate rebuilding costs, multiply your home’s square footage by local per-square-foot construction costs. At Electrum Properties, we specialize in solving real estate problems with win-win solutions and can provide valuable guidance to help you get your freedom back. Just call 806-630-0875 to learn more about protecting your investment.
Avoid the common mistake of “focus[ing] on what you paid for the house, how much you owe on your mortgage, your property tax, or the price you could get if you sell. If you base your coverage on those numbers, you could end up with the wrong amount of insurance. Instead, set your dwelling coverage limit at the cost to rebuild. You can be confident you’ll have enough funds for repairs, and you won’t be paying for more coverage than you need.”
For your personal property coverage, “you’ll generally want coverage limits that are at least 50% of your dwelling coverage amount, and your insurer may automatically set the limit that way.” You can adjust this coverage higher or lower based on your specific needs.
Regarding liability protection, experts recommend having a “limit at least high enough to cover your net worth,” including “savings, investment accounts, and other assets, minus auto loans, credit card balances, and other debts.”
Cost of Homeowners Insurance
So what does homeowner’s insurance cost? The national average is approximately $1,600 annually, but individual premiums can vary significantly. Your credit score can also influence your insurance costs.
When choosing your deductible – the amount you pay out-of-pocket before insurance covers the rest – consider these two key factors:
- A higher deductible will reduce your premium, but you’ll pay a lot more when you file a claim.
- With a lower deductible, you’ll pay a higher premium, but will pay a lot less out of your pocket for a claim.
When It’s Time to Buy
Ultimately, homeowners insurance isn’t a luxury – it’s a necessity. With so many factors and options to consider, determining the right policy and coverage can be challenging. At Electrum Properties, we specialize in helping homeowners make informed decisions that protect their investments and provide peace of mind. We solve real estate problems with cash solutions that create win-win outcomes. If you’re a Texas homebuyer trying to navigate the homeowner’s insurance maze, contact us today at 806-630-0875 for a personalized consultation that helps you get your freedom back.