Insurance and Homebuying
I’m back and I’m better, just in time for the Spring home buying season. Spring and Summer tend to be the hottest (literally) time to both buy and sell a home. Mostly due to families waiting ‘til school lets out to move and houses tend to show better in the spring with the bloom of flowers and “happier” weather. As a recent first time homebuyer and your personal insurance guru, I’m here to walk you through the steps of what to look for when purchasing insurance on a home whether it be your first or your fifth.
What are insurance companies looking for?
So you’ve found that home that you think is the winner and is within budget….well let me be the first to tell you that insurance can be a budget killer, especially when you have no idea what the cost of insurance looks like in the area. These costs can vary by subdivision or even by street. It’s important to have a good independent insurance agent on your side (cough, cough, me) that can review your personal coverage needs. You’re already one step ahead of the game if you know ahead of time what’s going to minimize or maximize your insurance expense when home shopping. Generally, the younger or more updated the home, the cheaper the insurance. This includes renovations to the most important elements of the home like heating, plumbing, roof year, A/C, and electrical. These are the major updates insurance companies tend to look for first, so a cosmetic remodel may not necessarily be enough to lower your insurance expense. Again, the neighborhood matters. A high claim activity area can drastically affect the cost of insurance for the surrounding areas. This can be anything from high theft claims to fires. As far as what you, the homeowner can control, there are discounts often available for having impact-resistant windows or home monitoring systems installed.
Replacement Cost vs. Selling Price
The most fundamental principle of insurance is to indemnify. To indemnify means to compensate or make whole after loss or harm. Most companies will require a client to have their home insured for 80–90% of replacement cost in order to cover the total cost of a loss. If underinsured, co-insurance penalties will apply…I could go on about co-insurance penalties for days but that may call for another post. When buying that new home the selling price and replacement cost may not be the same. If they were wayyy too far off that may be a red flag as a buyer. If the selling price is significantly higher than replacement cost, this may mean the area is highly inflated or highly coveted.
If the selling price is significantly lower than replacement cost that may mean the area is taking a downturn so be wary of the investment. I've personally walked away from a house for this reason. So remember to use this difference to gauge investment potential and what direction the area is taking. If you’d read my previous posts, I talk a lot about gentrification. Gentrification can heavily drive what these differences will be.
New Orleans, August 2005.
Ahhh good ‘ole flood insurance. One of my favorite topics; especially in New Orleans where half of a house can be in one flood zone and the other half in another. Flood Insurance can definitely make or break a deal when buying a home and IS NOT included in the cost of homeowners insurance. Just to give you a brief rundown: X, B, and C zones are less high risk and cheaper. A, AE, AR, A1–30,A99, V are higher risk zones and will likely be required to have flood insurance by a mortgage company. When living in a high-risk zone it's in your best interest to have your real estate agent request an elevation certificate, if available, or include the cost in closing. It may be a lifesaver when it comes to flood insurance premiums. Again, I walked away from another home simply because the flood insurance premium was a deal breaker. It always good to know what you’re getting into ahead of time so here’s the link to the FEMA flood map to determine your zone before buying. https://msc.fema.gov/portal/home
Buying a home can be a daunting process. From meeting with real estate agents, mortgage lenders, and insurance agents. Having an independent insurance agent on your side that has access to several carriers will be your best option when shopping for insurance. The advantage of having an independent agent is that they work for you and not the insurance company; allowing for priceless, unbiased advise. Visit our site at www.swansoninsagency.com for a free quote from your personal insurance guru and independent insurance agency.