Buying a home is exciting, but the additional burden of shopping for vendors never seems to end. In addition to real estate agents, inspectors and appraisers, you'll also have to buy homeowner's insurance. Before you start searching for a homeowner's policy, make sure you fully understand the advantages and disadvantages of paying for your policy in full before or at closing.
Advantages of Up-Front Payments
Many insurance companies or agents ask a homeowner to pay their initial insurance payment for one full year up-front. This allows the insurer to issue the lender an insurance binder. For the homeowner, one significant benefit includes locking in their rate for a full year, protecting them from rate increases.
Homeowners may be asked to pay for one quarter of their policy, one-half of the policy, or pay their policy in full. Before you pay your insurance up-front, ask your lender about their policies, as they may vary. Be aware that in nearly all cases, you'll be asked to pay one full year up-front.
Disadvantages of Up-Front Payments
Saving money is always a good reason to pay something ahead of time. However, there are still some downsides to paying your full policy up-front. Some of these include credit rating, the need for extra cash at closing, and a time crunch.
Your credit ratings often have an impact on how much your insurance company charges. Homeowners who have excellent credit are typically charged a lower rate than someone who has faced credit challenges.
Another common problem for a new home buyer is paying up-front costs. Oftentimes, a new homeowner saves money in anticipation of a down payment, application fees and other anticipated expenses. The additional burden of paying for homeowner's insurance up-front may not be something they had considered.
Finally, there are time factors to take into consideration. While insurance rates are typically set by the state, some companies offer discounts that others don't. When buying a home, time is an integral factor -- meaning there's often not enough time to shop around for a plan that offers better discounts.
Policy Language Matters
Most homeowners believe they are covered regardless of what happens to their home because they have insurance. Keep in mind that most policies carry some exclusions including flood, natural disasters and acts of war or terror. Before you pay your insurance premium, make sure you talk to your insurance agent to find out what's covered.
Many policies don't cover the entire cost of rebuilding in the event the home is destroyed by fire or other disaster. Your insurance agent should be able to explain all of the policies' benefits and drawbacks. Having sufficient insurance can help protect you financially.
One thing that's important to remember is that you must maintain a fully paid insurance policy on your home. This is part of your mortgage agreement. In the event you fail to maintain the proper coverage, your lender is allowed per the terms of your mortgage note to obtain a policy on your behalf. These policies may cost upwards of two to three times more than a policy you secure on your own.
Doreen Martel is a writer specializing in finance, nonprofit organizations and real estate. She has worked in the financial industry for more than 20 years. Martel is a graduate of Dean College in Franklin, Mass., holding a certificate in accounting.