Home Insurance Choices: Impact of Location and Property Type

Are you planning to buy your first home? Then you also need to think about home insurance. Many first-time buyers overlook this step, but it is not optional. Your lender will require it, and your financial security depends on it.

This guide breaks down the essentials in plain language. You will see why insurance is required, what policy types apply to different homes, and how choices about coverage, deductibles, and upgrades affect your costs.

• Mortgage lenders require it for the entire loan term.
• Your lender is listed on the policy as a mortgagee.
• If you let coverage lapse, the lender will buy a limited policy for you. These “force-placed” policies cost more and only protect the structure, not your belongings or liability.
• Without insurance, you risk losing financial protection for your home and may face higher monthly payments.

The type of property you buy determines the policy you need.

• HO3 policies cover dwelling, other structures, personal property (even off-site), loss of use, liability, and medical payments.

• HO6 policies focus on the inside of your unit. Exterior walls and common areas are covered by the condo association’s master policy.

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Your limits must reflect the cost to rebuild your home, not the market value.

Dwelling Coverage (A): Must equal full replacement cost. If it falls below 80%, payouts may be reduced.

Other coverage percentages:

• Personal Property: often 50% of dwelling coverage.

• Other Structures: often 10%.

• Loss of Use: often 20%.

Replacement Cost vs Actual Cash Value (ACV):

• Replacement cost pays to rebuild with similar materials.

• ACV subtracts for wear and tear and often leaves you underinsured.

• Standard deductible: The out-of-pocket amount you pay before the insurer pays a claim. Higher deductibles lower premiums, but only choose what you can afford.

• Wind and hail: Many insurers now require a separate deductible, usually a percentage of the home’s insured value. Example: 2% on a $400,000 home = $8,000.

• Roof schedules: Older roofs may be covered for ACV only. Replacing a roof before damage can improve your coverage and lower costs.

• Credit score matters. Dropping from “good” to “poor” raises rates by 63% on average, or $1,557 more per year.

• Rebuild cost, not purchase price.

• Material: Brick homes often cost less to insure than wood frame homes.

• Location: Distance to a fire station matters

• Age and condition of systems: Outdated wiring or plumbing increases premiums.

• Claims history of the property and neighborhood.

• Bundle with auto insurance.

• Install smoke detectors, alarms, or deadbolts.

• Update electrical or plumbing systems.

Standard policies exclude major natural disasters.

• Floods: Not covered. If your home is in a FEMA flood zone, flood insurance is required. Low-risk zones still file 20% of all flood claims.

• Earthquakes: Not covered. Separate coverage is required in high-risk areas.

• Wildfires in California: Many buyers rely on the FAIR Plan, which provides limited coverage. A wrap-around Difference-in-Conditions policy is often needed for full protection.

Climate change is also driving higher premiums and insurer exits in high-risk states. The national average premium in 2025 was $2,470. Homes in the riskiest 20% of areas paid 82% more than the safest 20%.

• Older homes often mean higher premiums because of old systems, brittle pipes, or foundation risks.

• Choose replacement cost coverage, not ACV.

• Upgrade electrical, plumbing, and roofing to reduce risk and lower premiums.

Compare quotes across insurers. Request the same coverage and limits from each to make a fair comparison.

Verify licensing and financial strength of insurers through your state regulator and rating agencies like A.M. Best.

Check the claims history of a property before you buy. Past claims affect your premium

Create a home inventory with photos, videos, and receipts. Store it securely off-site or online.

Understand non-standard insurance:

• Private Mortgage Insurance (PMI) protects the lender if your down payment is below 20%.

• Title Insurance protects against ownership disputes.

Home Warranties cover appliances and systems but are not insurance.

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Insurance is not only a lender requirement. It protects your largest purchase. By knowing the policy types, coverage options, and risk factors, you can make smarter choices and avoid surprise costs.

Focus on:

• Getting the right policy type for your home.

• Choosing replacement cost over ACV.

• Reviewing deductibles and ensuring you can cover them.

• Asking about discounts before you sign.

• Preparing for risks that standard policies exclude.

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