Homeowner’s insurance is just another essential part of owning a home. Most states and lenders require a homeowner to take out a homeowner’s insurance policy at closing or shortly after.

A policy protects you and your lender should something happen to your home, or on the premises of your home.

There are many factors that will determine your rates and premiums, so it is always important to shop around for a reputable insurer.

Once you have found a house that you are going to buy you should start shopping around for homeowner’s insurance to avoid any delays.  Most of the time, you have to have a policy ready and in place at closing, along with a check for the first year’s premiums. If you do not have this, the transaction could be delayed or even worse – canceled.

An October 30, 2006 article by Diane Hymer of Inman News, “Homeowner’s insurance: What you need to know,” gives some helpful tips on the topic as well as why it may not always be best to go with the cheapest policy.

“Most mortgage lenders require that home buyers take out a homeowner's insurance policy to protect the lender's interest in case there's a fire. It's a good idea to shop for homeowner's insurance soon after you enter into contract to buy a home.”

The first thing you need to do is research any claims or damages that may have occurred on or to the property, since this could cost you a lot of money in the long run.

“Before you start shopping, find out if any claims were made against the property during the past five years. Your insurance agent should have access to a data bank that will give you this information. Or, ask the home sellers directly.”

“If the property has been subject to water damage claims within the past five years, you may have trouble finding an insurer for the property. Or, you may have to pay more for insurance than you anticipated.”

As with any type of insurance there are different levels of coverage with homeowner’s insurance.  The best is Guaranteed Replacement Cost, which covers the entire cost of replacing/rebuilding your home even if that exceeds the policy limit.  But this type of coverage is very difficult to find anymore.

“The standard coverage today is Limited Replacement Cost Coverage. This type of policy will only pay up to the policy limit. So, if your house costs $750,000 to rebuild, but it's only insured for $500,000, this is all the insurance company will pay. With Limited Replacement Cost Coverage, it's important that you carry adequate coverage, even if your insurance agent thinks you need less.”

“A preferable type of insurance for many homeowners is Limited Replacement Cost Coverage with an Addition Percent, which pays the replacement cost up to a specified amount (often 20 percent) over the policy limit.”

Now the important thing to keep in mind is that if an agent quotes you an extremely low rate, they are probably trying to undercut their competitors, which is bad news for you, since you could end up underinsured.  

Make sure the insurance agent who is giving you a quote is familiar with building costs in the area, since construction costs are cheaper in some areas than others.

“Unfortunately, some local insurance agents give a quote based on a low replacement cost in order to undercut their competitors. If you go with the low bidder, you may find at closing that you don't have adequate coverage according to the lender's requirements for funding the loan. This could delay the closing. Most lenders want the structure to be insured for the replacement cost value specified on the appraisal that was done for the lender.”

Understanding these caveats of homeowner’s insurance will help the process run a lot more smoothly.