A homeowner protects his financial investment in his property, as well as the personal items it holds, with homeowners insurance. Owning a condominium or a house in a new subdivision or planned unit development usually means paying a homeowners association (HOA) fee to maintain the portions of shared real estate, or common areas. Homeowners insurance and HOAs serve distinct purposes, although both are intended to protect your financial interests (and your lender's, if you have a mortgage).
You need homeowners insurance to remain in good standing with your mortgage lender. It requires you to prepay a one-year premium at closing to ensure your condo unit or house is protected for a specific amount. It can even buy homeowners insurance on your behalf and bill you for it if you allow the policy to lapse. Lenders usually require you to buy enough coverage to pay the expense of rebuilding your home from the ground up -- known as the replacement cost.
Your HOA fees contribute to paying a master policy. HOAs insure the shared real estate among homeowners in a complex or community, including: pools, clubhouses, common walls, basements, parking structures, stairways and lobbies. HOAs usually carry liability insurance, protecting homeowners against lawsuits resulting from personal injuries that take place on the premises. They can also protect you from lawsuits filed by HOA or property management employees, which typically involve workers compensation. Master policies also cover major repairs due to inclement weather, certain natural disasters and fire. Minimum requirements for master policies vary by state and complex.
A standard homeowners insurance policy protects your individual interests in the event of a fire, vandalism, theft or accident within your unit or on your home's property. You can customize your coverage to include protection for earthquake, flooding and other specific events not required by your lender. The amount of insurance you should get depends on your specific household needs. For example, you may want to insure possessions of high value, such as jewelry, art and heirlooms. Your costs may vary depending on the level of risk you present. For example, your neighborhood's crime rate, your dog's breed, your credit score and whether you smoke are all factors that affect your premium.
The lender calculates the monthly cost of homeowners insurance and your HOA fees when considering whether you can afford a particular home. In the absence of a mortgage, homeowners insurance protects you from everyday problems that may arise and cause a financial hardship that the HOA insurance does not cover. You can review your HOA's master policy before buying a home or request it directly from them to determine the master policy's limitations.
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