Homeowners insurance is something you know you should have, especially if you have a mortgage, but how much do you really understand about it? Are you aware of what it covers and doesn’t cover, the different types of policies, and how much coverage you need? What happens in the event of minor storm damage or even a rare fire? If you’re unsure, you might be overpaying or underinsured. To assist you, we’ve created this homeowners insurance guide for homebuyers in Dallas-Fort Worth.

Homeowners Insurance Overview

Homeowner’s insurance acts as a safety net, providing compensation if an event covered by your policy damages or destroys your home or personal belongings. It also offers protection in cases where you injure someone else or cause property damage.

The three primary functions of this insurance are to:

1. Repair your home, yard, and other structures.
2. Repair or replace your personal belongings.
3. Provide coverage for personal liability if you are legally responsible for someone else’s injury or property damage.

There are three main levels of coverage in homeowner’s insurance: actual cash value, replacement cost, and extended replacement cost/value. Additionally, “[p]olicy rates are primarily influenced by the insurer’s assessment of the risk of a claim being filed,” which is based on “the home’s past claim history, the neighborhood, and the condition of the home.”

Types of Policies

There are several types of homeowner’s insurance (also called “policy forms”), with some providing more coverage than others. The most common policy types are . . . 

HO-1 and HO-2

These are the least popular types of homeowner’s insurance, offering minimal coverage. They provide payouts only for damages caused by specific issues listed in the policy. Combined, HO-1 and HO-2 policies make up about 8% of homeowner’s coverage. HO-2, the more common of the two, generally covers your home and belongings only for the 16 listed causes of damage. HO-1, which is less widely available, provides even more limited coverage, protecting against a shorter list of perils than HO-2.

HO-3

HO-3 insurance policies, also known as ‘special form,’ are the most common, covering nearly 80% of owner-occupied homes. If you have a mortgage, your lender will likely require this level of coverage. HO-3 policies typically cover damage to your home from any cause except those specifically excluded, such as earthquakes or floods. For personal belongings, however, HO-3 usually covers damage only from the 16 ‘named perils’ unless additional coverage is purchased.

HO-5

Known as comprehensive form or premier coverage, HO-5 offers the broadest and most extensive protection. It covers damage to your home and belongings from all causes except those specifically excluded in the policy. HO-5 is usually available only for well-maintained homes in low-risk areas, and not all insurers offer this type of coverage.

Replacement Cost, Actual Cash Value, and More

Be aware that “[i]f your home is destroyed, your homeowner’s insurance company is unlikely to simply issue a check for the policy amount. The payout may vary based on the cost to rebuild and the type of coverage you selected. In many cases, a significant portion of the payment will go directly to the contractors handling the reconstruction of your home.”

Concerning this, here are some things you need to consider when deciding on coverage:

Replacement Cost

This coverage pays whatever amount is necessary to rebuild your home, even if it exceeds your policy limits. “This situation can occur if construction costs in your area have risen while your coverage amount has stayed the same.”

Actual Cash Value

“Actual cash value coverage reimburses the cost to repair or replace your damaged property, after accounting for depreciation. While this method is not typically used for the home itself, it is commonly applied to personal belongings.”

Functional Replacement Cost Value

This type of coverage will pay to repair damage to your home, but it may use less expensive materials than the original ones. For instance, if plaster walls are damaged, they might be repaired with drywall, which is a more affordable option.

Replacement Cost Value

“Replacement cost value coverage pays to repair your home using materials of ‘like kind and quality,’ meaning plaster walls can be replaced with new plaster. However, the payout will not exceed the dwelling coverage limits specified in your policy.”

Extendded Placement Cost Value

This type of coverage “will pay more than the stated value of your dwelling coverage, up to a specified limit, if necessary to repair your home.” This limit is usually expressed as a percentage or a dollar amount, providing “a cushion in case rebuilding costs are higher than anticipated.”

Guaranteed Replacement Cost Value

“Guaranteed replacement cost value coverage covers the entire cost to repair or rebuild your home after a covered loss, even if it surpasses your policy limits.” However, not all insurance companies offer this level of coverage.

Determining Amount of Coverage Needed

Now, it’s essential to determine how much coverage you need from your homeowner’s insurance. You’ll want enough coverage to rebuild or repair your home if it’s destroyed or severely damaged. You can estimate the rebuilding cost by multiplying your home’s square footage by the local construction cost per square foot. Your Dallas-Fort Worth agent can also assist with this—just call (214) 296-2343 for more information.

Avoid basing your coverage on the price you paid for the house, your mortgage balance, property taxes, or potential resale value. If you do, you could end up with insufficient coverage. Instead, set your dwelling coverage limit based on the cost to rebuild. This ensures you’ll have enough funds for repairs without paying for unnecessary coverage.

For your personal property, it’s generally recommended to have coverage limits at least 50% of your dwelling coverage amount, and your insurer may automatically set it that way. However, you can adjust this limit if needed.

As for your liability limit, experts suggest setting it high enough to cover your net worth, including savings, investments, and other assets, minus debts like auto loans and credit card balances.

Cost of Homeowners Insurance

What does homeowner’s insurance typically cost? On average, it’s around $1,600 per year across the country, though actual costs can vary significantly depending on individual circumstances. Your credit score can also play a role in determining your insurance rate.

Another important factor to consider is the deductible—the amount you must pay out of pocket before your insurance coverage begins. Here are two key points to remember when selecting your policy’s deductible:

• A higher deductible lowers your premium but means you’ll pay more when you file a claim.
• A lower deductible results in a higher premium, but you’ll pay less out of pocket if you need to make a claim.

When It’s Time to Buy

Homeowners insurance isn’t just a luxury—it’s a necessity. With so many factors to consider and options available, finding the right policy and coverage can be overwhelming. That’s where an experienced agent in Dallas-Fort Worth can make a difference. If you’re a home buyer in Dallas-Fort Worth trying to navigate the complexities of homeowner’s insurance, we’re here to help. Contact TX Home Buying Pros today at (214) 296-2343. Let us guide you toward the right insurance solution for your new home—don’t wait, call us now!