Nolo's Essential Guide to Buying Your First Home (64 page)

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Authors: Ilona Bray,Alayna Schroeder,Marcia Stewart

Tags: #Law, #Business & Economics, #House buying, #Property, #Real Estate

BOOK: Nolo's Essential Guide to Buying Your First Home
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Reasons to Choose a High Deductible
 
A deductible is the amount you must pay after a loss before your insurance company steps in and starts paying. Most homeowners agree to a $500 deductible (for the hazard portion; liability insurance doesn’t normally carry a deductible). However, many insurance companies now set the deductible at a higher, often percentage-based amount, such as 1% of the hazard insurance amount. Your policy may also have additional, separate deductibles for particular damages such as windstorms.
Agreeing to a higher-than-average deductible can actually be a great financial move. For one thing, it allows you to reduce your premium costs—or buy more coverage for the same premium. By raising your deductible from $250 to $1,000, you can save as much as 25% on your premiums. Some insurance companies will let you take your deductible up to $5,000 or more.
Another plus is that you may be better off not calling your insurance company for relatively small losses, anyway. Many homeowners just fix minor damage without a peep to their insurer, because of the very real risk that the company will punish them with raised premiums the following year. The raise in rates can be higher than the amount of your claim.
If only your mortgage lender weren’t weighing in on the size of your deductible: Ever vigilant about protecting its collateral, your lender may place a limit on how high a deductible you agree to—often $1,000. They’re afraid that if you don’t keep that amount of money in the bank, you won’t be able to claim any insurance after a loss, and the house will remain damaged.
No matter what deductible you choose, make sure you keep at least that amount of money in the bank. Otherwise, you risk being unable to use your insurance and facing major losses on your own.
Discounts for Lowered Risk
 
Most insurance companies will knock a little off your premium if your house:
• has smoke alarms and fire extinguishers
• has deadbolt locks
• has burglar and fire alarms that report to a central service
• has weather-resistant features such as hurricane shutters
• was built within the last ten years, or
• was built using fire-resistant construction, such as block or masonry.
 
Your own personal characteristics can sometimes also get you discounts or reduced rates, for example, if you’re a nonsmoker or have a good credit rating (the theory being that you’re less likely to start fires or to be generally irresponsible).
 
TIP
 
Don’t hide a home-based business.
Its inventory, equipment, and location (if it’s a separate structure like a garage) will be excluded from coverage under most policies. And your business-related visitors won’t be covered under the liability portion. Either buy the added coverage, or get a separate policy.
 
Shopping Around for Homeowners’ Insurance
 
A lot of buyers just go with the insurance company their real estate agent recommends. But doing some price comparison—preferably between three or four companies—could save you hundreds of dollars.
And money isn’t your only concern. You want a customer-friendly, cooperative insurance company that will make you feel supported after damage happens, not put you through bureaucratic hoops and delay your payment. Get some price quotes and policy descriptions for the amount and type of insurance your house will need; you have three choices:
• companies who sell insurance directly to you (sometimes at a distance, for example, on the phone or via the Internet)
• companies that sell insurance through so-called “captive agents” who represent only that company, and
• agents or brokers who represent more than one company.
 
The third option is often best, since the agent will give you a range of choices. But if your friends and real estate agent are pointing to one company as affordable and consumer-friendly, ask it for a quote. If you’re coming up short, get online quotes from multiple companies at
www.insweb.com
(but it doesn’t include some of the big companies like State Farm). Also, if you’re happy with your car insurance, contact that company’s representative to ask whether it offers a dual-policy discount (often 5% to 15%). And for information about particular companies, check with your state insurance department, which may track local insurance rates and complaints.
Jointly Owned, Jointly Insured: What Your Community Association Pays For
 
If you’re buying a condo, co-op, or other property in a community interest development, the community association should already have bought a “master policy,” including hazard and liability coverage. It will cover common areas such as the roof, walkways, furnace, pool, and building your unit is in, but not usually your actual unit. If the roof leaks, the furnace dies, or a passerby falls into the pool, you won’t have to get involved—or pay.
Still, it’s worth examining the master policy for completeness. Many condo owners have learned only after a flood or earthquake that their association hadn’t bought insurance for these hazards. Worse yet, a clause in your association’s CC&Rs may allow it to collect from you personally if its master policy doesn’t cover the full extent of a loss.
Coverage for the inside of your own unit is more complicated. The master policy’s coverage may stop at your unit’s bare walls, ceilings, and floors, or it may also include your cabinets, plumbing, appliances, carpeting, wallpaper, wiring, light fixtures, and more. You may have to worry, for example, about a fire that burns up your cabinets and appliances, a burglary, or someone slipping in your bathroom. Check with your association for details. Then buy insurance to fill any gaps. Special condo and co-op policies are available.
 
CHECK IT OUT
 
To learn more about homeowners’ insurance:
See the Insurance Information Institute’s website (
www.iii.org
). Also see
The Insurance Maze
, by Kimberly Lankford (Kaplan Business).
 
Home Warranties for Preowned Houses
 
Getting a home warranty—which provides service and replacement for certain home repairs—should be both the last and the least of your worries. (Though if you might want one, decide now, because they become unavailable after the closing.) If you’re buying a newly built home, skip to the next section.
A home warranty provides repair and replacement of mechanical systems and attached appliances in your house, such as the furnace, plumbing, and electricity, and for an added fee, the air conditioner, spa, pool, and roof. If one of these breaks due to normal wear, you call your warranty company. If it believes you’re covered (a big “if,” which we’ll discuss), it sends a repairperson. You pay a set fee for parts and labor, usually $50 to $100.
Unfortunately, you could spend all night reading consumer complaints against home warranty companies. The “preexisting condition” clause in most warranties incites the most outrage. People complain, “I bought the policy in case the house contained hidden defects—now they say it covers only new problems!”
Other common policy exclusions include inaccessible areas, your failure to have the item serviced as often as recommended (will you remember to change your A/C filter once a year?), and improper installation. The policy may also require you to pay to upgrade a system to current building code standards before it pays for repairs. And if your toddler flushes a teddy bear down the toilet, that’s not “normal wear and tear,” so you’re on your own.
Home warranties cost around $300 to $900 per year, depending on your house. Many sellers will offer to pay for the first year, as a way of inspiring confidence. In this case, your decision is easy—say yes, unless you’d rather negotiate for something else. Or, your own real estate agent may offer to pay, in the name of customer satisfaction.
If the seller or your agent isn’t paying, however, you might save your money—and put it toward your annual repair fund. Setting aside $5,000 per year for home repairs is recommended (unrealistic for most, but worth a try).
All that being said, some people love their home warranties. If a major home system breaks down, and you get a good, cooperative repairperson, and your warranty company does cover it, you’ll be smiling. Just make sure to look into several different companies’ warranties, and read the exclusions.
Also check whether a government agency in your state—probably either your department of insurance (as in California) or real estate (as in Texas)—regulates home warranty companies. If so, contact that agency to check complaint records. But not all states have passed regulatory laws. If regulation is loose or nonexistent, pick a company with a long history in your state.
Home Warranties for Newly Built Houses
 
If you’re buying a newly built house, don’t consider one that isn’t backed with a builder’s warranty. Reputable builders won’t balk at this. What this often means is that the builder promises to assess any problem and arrange for repairs. (Get this in writing.) In other cases, it means the builder buys you a warranty.
No matter where the warranty comes from, read it carefully to find out what it covers. For the first year, it should cover workmanship and materials on everything from the roof to the structure to the mechanical systems. The builder is off the hook for appliances or fixtures whose manufacturers provided separate warranties. The best builders will also plan to schedule one or two inspections during the first year, in order to find and repair any nonemergency problems. After that year, most builder warranties cover mechanical systems (plumbing, electric, heating, and A/C) for two years and the basic structure for ten years.
As with any warranty, damage due to normal wear and tear isn’t covered. It will also be your responsibility to take care of normal upkeep, such as annual servicing on the heating and air conditioning system, and simple maintenance like caulking the seams around windows and tubs.
 
CHECK IT OUT
 
Most states regulate builder warranties.
Check your state government website for consumer information, for example, via
www.visa.gov
(click “State Government”).

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