Homeowners insurance (HOI), also called hazard insurance, is a way that you can protect your home and valuables against loss in the case of various contingencies such as fire, lightning, wind, hail or theft, not including floods, warfare, or nuclear explosions.
Some insect infestations (termites for example) are also not covered unless add-ons are purchased. Add-ons for floods are available as well.
Another great provision in homeowners insurance is legal coverage should somebody sue you, for example because somebody tripped on your doorstep and wants you to pay their medical costs.
Homeowners insurance isn’t required of everyone, but is usually required if your equity in the home is below a certain level (for example 20%).
That means when you start out with your mortgage, you will probably be required to buy homeowners insurance until you’ve paid off more on the house. The amount of equity you’ll need to build up before you can cut off your homeowners insurance can vary depending on the lender.
There are a lot of benefits to having homeowners insurance, so you may want to hang onto it anyway. It can add hundreds of dollars each month to your expenses though, so it may become a financial burden.
If you are using a home equity loan or line of credit to liquidate some of your equity in your home into cash later down the line, keep in mind that if your equity dips below the pre-determined threshold again, you will once more be responsible for getting homeowners insurance in order to meet the terms of your mortgage.
If you don’t have homeowners insurance and you are tight on cash, you won’t want this to happen, so it’s important to keep your spending guarded.
Only use a home equity line of credit or loan on truly important expenses, not on things you can afford to live without. That means using home equity loans for things like medical bills, not necessarily for upgrading your kitchen.
If you haven’t yet signed on a mortgage, make sure that you are aware of the terms regarding homeowners insurance in advance so that you don’t forget to calculate the cost of HOI into your planned expenses.
Forgetting to budget something as major as homeowners insurance could lead to financial difficulties in the future. Find out what you will need to pay on insurance before you decide to put a down payment on a house.