When purchasing a home, there can be a million questions that need answering, especially when it comes to getting the proper insurance to protect such an important investment.
Soon-to-be homeowners may see both title and homeowners insurance on the lending documentation and wonder what the difference is between the two.
Both types of insurance can provide vital coverage for homeowners, but they differ vastly in their purpose and protection.
What Is Homeowners Insurance?
Taking out a homeowners insurance policy protects a home, as well as personal property, from either loss or damage. It may also provide insurance in the event someone is injured while they are on the property.
Some common things homeowners insurance may cover are:
• Damage that may occur in the home, garage, or other buildings on the property.
• Damaged, lost, or stolen personal property, such as furniture.
• Temporary housing expenses if the homeowner must live elsewhere during home repairs.
Homeowners insurance may also cover the following claims depending on what a specific policy covers.
• Physical injury or property damage to others caused by the homeowner’s negligence.
• An accident that happens at home, or away from home, for which the homeowner is responsible.
• Injuries that take place in or around the home to any person who is not a family member of the homeowner.
• Some coverage may apply to lost or stolen money, jewelry, gold, or stamp and coin collections.
• Damage or loss of personal property in storage.
Buying Homeowners Insurance
While someone can legally own a home without taking out homeowners insurance, the mortgage loan holder may require the homeowner to purchase an insurance policy. Typically, lenders do require this as a condition of the home loan. When shopping for homeowners insurance, there are a few things that can be worth keeping in mind.
The cost of homeowners insurance can vary depending on the value of the home and personal belongings, as well as the desired coverage.
To begin, it’s important to understand that homeowners need to insure the home, but not the land underneath it. Some natural disasters—tornadoes and lightning, for example—are covered by typical homeowners policies. Floods and earthquakes, however, are not.
Homeowners in an area where floods or earthquakes are common may want to consider purchasing extra insurance to cover damages from potential disasters. Checking your policy for specific coverage is recommended.
Special coverage may also be worthwhile for those who own valuable art, jewelry, computers, or antiques.
Buying just enough coverage to replace insured property can save money. There are typically two policy options available to homeowners, “replacement cost coverage” and “actual cash value.” The former covers the cost to rebuild the home and replace any of its contents. The latter simply pays the current value of the property at the time of experienced loss.
Actual cash value will oftentimes pay less than replacement cost coverage, because any age or wear to the home can lower the value.
When it comes time to shop for homeowners insurance, asking trusted friends, family, or financial advisors for their recommendations can be a good place to start. Searching for homeowners insurance companies online can be helpful, too, as it’s possible to consider customer reviews when doing so.
Before making a final decision, it can be worthwhile to contact multiple companies and request quotes in writing to compare their offerings. That process can give a good idea of who is offering the best coverage for the most affordable price.
What Is Title Insurance?
Title insurance provides protection against losses and hidden costs that may occur if the title to a property has defects such as encumbrances, liens, or any defects unknown when the title policy was first issued.
The insurer is responsible for reimbursing either the homeowner or the lender for any losses the policy covers, as well as any related legal expenses.
Title insurance can protect both the homeowner and lender if the title of the property is challenged. If there is an alleged title defect, which the homeowner may be unaware of at the time of purchase, title insurance can provide protection to cover any losses resulting from a covered claim.
The policy will cover legal fees incurred if there is a claim against the property.
Buying Title Insurance
Both home buyers and lenders can purchase title insurance. If the home buyer is the purchaser, they may want to insure the full value of the property (the value of the property will affect how much the policy costs). When the lender is the purchaser, they typically only cover the amount of the homeowner’s loan. When it comes time for a home buyer to purchase title insurance, it’s worth noting that they have full choice of the insurer.
According to the Real Estate Settlement Procedures Act (RESPA) of 1974, the seller cannot require the home buyer to purchase title insurance from one certain company.
Lenders are required to provide a list of local companies that provide closing services, of which title insurance is just one. But it may be worth doing independent research, as lenders may not select their recommendations based on the home buyer’s best interest, but instead because a service provider is an affiliate of the lender and provides a financial incentive in exchange for a recommendation.
Again, seeking the counsel of friends and family and doing online research may help uncover competitive prices and learn which service providers have a solid reputation.
In short, title insurance can protect against losses caused by defects in the title and is a one-time fee payable during the closing process. Homeowners insurance, on the other hand, is an ongoing cost (billed monthly, quarterly, or annually) that helps cover damage or loss of the home and possessions within the home.
The advantage to having both types of coverage is that each policy can protect homeowners against financial loss in very different circumstances.
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