The home buying process is an extensive one. You need to determine how much home you can afford, save for a down payment, find a trusted real estate agent, get pre-approved for a mortgage, not to mention all the insurance you need in order to finalize the purchase of a home.
An insurance policy you may need to purchase is hazard insurance.
Hazard insurance is a type of insurance that protects a property owner from damage that is caused by fires and natural disasters like severe storms, hail, etc. So long as the specific weather event is covered within the insurance policy, the property owner will receive money for the cost of the damage sustained to their property. It is essential to have that it is a requirement to qualify for a mortgage.
Hazard insurance is sometimes also called catastrophe insurance. However, they are technically different. Hazard insurance refers to a portion of a homeowners insurance policy that protects the structure of their home. In comparison, catastrophe insurance refers to a separate policy that covers specific disasters.
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How Does Hazard Insurance Work?
Hazard insurance protects a homeowner against damage caused by hail, storms, fires, and other natural events. To be prepared for every scenario, homeowners should ensure that common hazards in their area of the world are covered by their insurance policy.
It is better to pay extra for a hazard insurance policy than to deal with all these issues out of pocket when they arise. With the increase of climate change – it is becoming more vital for homeowners to invest in hazard insurance.
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What Is The Difference Between Hazard Insurance And Homeowners Insurance?
Hazard insurance is a part of homeowners insurance and not separate from home insurance. Lenders refer to hazard insurance separately, despite being a part of homeowners insurance.
Is Hazard Insurance Necessary?
Yes. Hazard insurance is required to take out a mortgage on a home. Therefore, it is a critical part of homeownership.
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Is Hazard Insurance Required When Taking Out a Mortgage?
Most often, lenders require homeowners to have homeowners insurance when taking out a mortgage on their home. Typically, a general homeowners policy will be good enough to meet the lender’s (bank) requirement; however, if you have a costly property located in a high-risk area, the lender (bank) may require you to get additional coverage.
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Additional Hazard Insurance Policies
In certain parts of the U.S., certain natural disasters or other weather-related activities are excluded from the hazard covered on their homeowners’ insurance policy – typically because these natural disasters are common in that area and could prove too costly on the insurer. Therefore, it is common for homeowners to buy separate hazard insurance to cover that specific natural disaster.
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There are two optional types of coverage:
Extended Replacement Cost
Suppose a natural disaster causes widespread damage in your region. In that case, local construction costs can increase due to the demand, meaning that your replacement cost coverage may not be enough. What extended replacement cost coverage does is it provides a buffer in the event of this happening. This coverage can pay out anywhere between 10% to 50% above your coverage limit, which can provide some extra peace of mind.
Guaranteed Replacement Cost
Guaranteed replacement cost coverage pays as much as necessary to rebuild your home.
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How Much Is Hazard Insurance?
The cost of hazard insurance will vary depending on several different factors. Some factors taken into consideration include the age of a home, size, and credit score. The cost of hazard insurance will also depend on the deductibles and limits that you have selected.
Living in a specific location may affect the cost of hazard insurance due to the risk associated with ensuring that area.
Since hazard insurance can be pretty costly in specific areas, several mortgage lenders offer an escrow account that allows you to divide the cost into monthly payments.
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What Is An Escrow?
According to Rocket Mortgage, an Escrow is a legal arrangement in which a third party holds large sums of money or property until a specified condition has been met.
It is commonly used in real estate deals to protect both the buyer and the seller throughout the homebuying process.
Types of Escrow Accounts
When it comes to real estate, escrow is most commonly used for two reasons:
- Protect the buyer’s good faith deposit
- Hold homeowner’s funds for taxes and insurance
One is used during the homebuying process; the other is used throughout the life of your loan (mortgage)
Benefits of an Escrow Account
The most significant upside of having an escrow account is your protection during a real estate transaction, regardless of which side you’re on. It can also provide homeowner protection by ensuring that you have the funds to pay for property taxes and homeowners insurance when you receive your bulls.
- For Homebuyers: An escrow account is critical to protecting your deposit when purchasing a home. When a third party holds your deposit, it reassures you that it will be safe if there is an issue along the way.
- For Homeowners: An escrow account alleviates the stress of coming up with a lump sum to cover taxes insurance. Payments are much more manageable when you make periodic payments throughout the year.
- For Lenders: An escrow account on loan gives lenders assurance that your bills will get paid.
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What Does Hazard Insurance On Your Home Cover?
Insurance policies can be complicated to understand if you aren’t well versed in insurance vernacular. However, in general, hazard insurance covers strictly what is mentioned in the policy. Therefore, it is critical to ensure that the hazard insurance policy you purchase covers natural disasters common to the area you live in.
Not all hazard insurance is the same. It may be a good idea to speak with an insurance agent and educate yourself on the gaps and risks associated with each policy you are considering.
What is Covered?
Hazard insurance covers several categories. For example, most natural disasters and select home malfunctions are covered by hazard insurance. These include:
Lightning damage
Damage from snow and ice
Theft and vandalism
Damage caused by electric currents, AC units, and heating
Hail and wind damage
Volcanic eruptions
Falling objects
Riots
Explosions
Sudden damage from power surges
Sudden cracking of a hot water system
Fire and smoke damage
What Is Not Covered
Hazard insurance does not cover injuries sustained to your property or damage to your personal belongings/property. This means that if a natural disaster occurs in your area, hazard insurance will only insure your home’s structure.
It is important to remember that floods are not covered by hazard insurance. Therefore, if you want protection against that, you must purchase flood insurance separately. Other disasters that aren’t covered include pest infestations, mold, and damage incurred over time.
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