Homeowners Insurance Costs and Considerations
Owning a home comes with some significant responsibilities. As a homeowner, you must keep up with routine maintenance and repairs and be prepared for the unexpected. It's an indication of how important these responsibilities are that your mortgage lender will require proof of homeowners insurance at your closing.
At SIRVA Mortgage, we work with people like you every day to help them navigate the home buying process. Since homeowners insurance is something many first-time buyers aren't familiar with, we've created this primer to help you get the coverage you need.
What is Homeowners Insurance?
A homeowners insurance policy provides insurance that covers the structure of your home and your personal belongings. It also provides liability coverage for any injury to another person or damage to their property caused by you or a member of your family, including the family pets.
If your personal property or the home itself is damaged by a covered event, your homeowners insurance policy will pay for the replacement cost of your property or the cost to repair the damage to your home.
Your policy should have a coverage limit that is appropriate for the value of your home and belongings. You will have a deductible that you will be required to pay before the insurance provider pays for anything. In other words, a small amount of damage that does not exceed the deductible amount will be your responsibility and not that of the homeowners insurance company.
Before you begin to shop for home insurance for your new house, you should understand the things that a typical home insurance policy covers and the things that aren't covered.
Let's start with what's covered by your homeowners insurance. The coverage generally includes the following things:
The structure of your home and any other buildings on the property, including separate garages and other outbuildings.
Property damage caused by covered events. For example, if a tree fell on your roof during a windstorm, your policy would cover the repair to your roof.
Your personal property and belongings. If your roof was damaged and rain and wind ruined your furniture, you could file an insurance claim to cover the cost to replace it.
Your personal liability. As we mentioned above, your property insurance also includes liability insurance, which covers you and your family for any damage or injury caused to someone else up to a certain limit.
The coverage provided is broad but not all-inclusive. The following things are generally not included in a typical home insurance policy, although some may be available at an additional premium.
Damage from floods
Damage from earthquakes
Neglect (poor maintenance)
Some of these exclusions have remedies. For example, if you are willing to absorb an increased insurance cost, you can buy flood or earthquake insurance. Doing so may be a virtual necessity depending on where you live. For example, a homeowner who buys a house next to a tributary of the Mississippi River should have flood insurance, and may be required to do so to protect the lender if the area has been declared as a high risk for flood according to the Federal Emergency Management Agency (FEMA). Someone who lives in California should have earthquake insurance.
However, some of the limitations of a home insurance policy cannot be remedied or eliminated. There is no rider to provide coverage for a government action. The risk of an event that would fall under this policy exclusion is low but it's important to be aware of it before you shop for insurance.
How Much Does Homeowners Insurance Cost?
To purchase home insurance, you'll generally need to pay the first year’s homeowners insurance premium at or prior to the time of closing on your home. Some mortgage programs require borrowers to pay into an escrow account each month, which will then be used to pay the annual premium when it comes due the following year. If you are not establishing an escrow account you have the option of paying your insurance provider directly. Most carriers will allow you to choose to pay monthly, quarterly, or annually after the first year.
Average Cost in the United States
Let's start by talking about the average homeowners insurance cost per year in the United States. Before we tell you the average, you should know that an average may be significantly higher or significantly lower than the cost in your area. There are several factors that play a role in determining insurance cost.
According to Policygenius, the average annual cost of homeowners insurance in the United States is $1,250. To give you an idea of how wide the range is, the state with the lowest average cost is Utah, which comes in at just $730. The state with the highest average cost is Louisiana, which comes in at $1,987.
It's important to note that the cost of housing is not the primary factor in determining how much insurance premiums are. The median home value in Utah is significantly higher than in Louisiana. You might be able to guess that the risk of hurricane damage in Louisiana is the explanation for why an insurance provider might have high premiums for homeowners insurance.
Factors That Affect Homeowners Insurance Cost
Now, let's talk about the factors that influence the premium your insurer charges you for a homeowners policy other than the location of the home. The first list of factors have to do with the structure of your home.
The age of your home
The condition of the roof
Wood burning stove
Pool or hot tub
The presence of a wood burning stove increases the risk of a house fire, although you may be able to mitigate the costs if you can prove that the stove was installed by a licensed professional and that you have smoke detectors and a fire extinguisher near the stove. A pool or hot tub increases potential liability, while remodeling can increase the replacement value of your home.
The next set of factors is related to the location of your home, and there are only two to consider.
Proximity to water
Proximity to a fire station
Homes that are near a fully-staffed fire station usually cost less to insure than those that are farther away. The reverse is true of water. Any home that is close to a body of water is more likely to sustain water or wind damage.
The third set of factors relates to personal factors that can impact the home insurance company's risk.
Your marital status
The breed of your dog
Your credit history
Your claims history
Whether you own a home-based business
Historically speaking, married people tend to file fewer claims than single people. Some dogs are more likely to be a liability risk than others (for example a Rottweiler is more likely to bite someone than a golden retriever.) If you own a home-based business, you will probably need to purchase a rider to cover business equipment and your business liability.
The final list of factors relate to the coverage you purchase, and includes the following.
Home liability limits
A policy with a high deductible will cost less than one with a low deductible, and a high-value home will require a higher limit than a low-value home.
As you can see, there are many factors that may influence your homeowners insurance premium.
Add-Ons and Riders to Consider
When you buy insurance coverage for your home, you should talk to your insurance agent or carrier about add-ons and riders to your regular homeowners policy. Riders provide additional coverage for things that don't fall under your regular property insurance.
In the United States, flood insurance may only be purchased through the National Flood Insurance Program, which also provides hurricane coverage. People who live near the water or in an area with poor drainage may want to consider purchasing flood insurance. The National Flood Insurance Program is managed by FEMA and is delivered to the public through a network of approximately sixty insurance companies throughout the country. If you live in an area that is located in a flood zone as indicated by the flood maps issued by FEMA, your lender will require you to purchase flood insurance and you will also be required to pay the monthly premium out of an escrow account
Coverage for damage caused by earthquakes is not generally included in property insurance, so if you live in an area that's prone to seismic activity, buying earthquake insurance makes sense.
If you work as a freelancer or have a home-based business, you may want to consider a home-based business rider. The rider will cover your office equipment in the event it gets damaged. It will also cover your liability if a business visitor sustains an injury on your property.
Sewer Backup Rider
If your home has a septic system, you should add a sewer backup rider to your home insurance policy. Even if your home is on the public sewage system and you have a backwater valve installed, adding this rider can provide you with some peace of mind in the event of a problem.
If you own a small boat (or more than one), then you should consider adding a watercraft endorsement to your homeowners policy. Insurance coverage for boats is not included in homeowners policies, so you'll need to add it to get coverage for damage to boats and for liability. If you have a ship or a yacht, you'll need to buy a separate boat insurance policy for it.
Ordinary inflation can make a big difference in the replacement value of your home. For that reason, adding an inflation guard can help to provide the funds you need to repair or rebuild your house in the event of a disaster. This rider increases your policy coverage every year to account for inflation.
Scheduled Personal Property
The final thing to consider is the presence of high-value items in your home. If you have heirloom jewelry or grandma's Monet, you'll need to add a rider that covers the actual cash value of your expensive belongings. You can list items by group or individually and you'll be covered against damage, breakage, and theft. Some items to consider scheduling include jewelry, electronics, artwork, and collectibles.
The riders we have listed here should cover most of the liability and damage not covered by a traditional homeowners insurance policy. This list is not all inclusive and you should ask your insurance agent about anything that we haven't included here.
Tips for Choosing the Right Coverage
To close on your home, you must have sufficient property and liability coverage to satisfy your mortgage lender's requirements. Your home insurance company will quote you an insurance rate that's based on the coverage you choose. Here are some tips to help you determine how much coverage you need.
The deductible for any insurance coverage is the amount of a claim you are responsible for as a policyholder. If you have damage amounting to less than the deductible, you will be liable for the entire amount. In most cases, the insurance company will simply subtract the deductible amount from the claim payment, which means that you won't need to pay out of pocket for the deductible up front when you make a claim.
Your insurer will list your deductible in one of two ways. The first is as a dollar amount, such as $500 or $1,000. The second is as a percentage of the value of your home, usually no more than 1% or 2%. You should choose a higher deductible if you want to keep your home insurance rate low and you can afford to pay the deductible amount in the event you need to file a claim. A low deductible will translate to a higher home insurance rate but less need to pay out of pocket for expenses related to a claim. Lenders may also have maximum deductible requirements that they will allow for an acceptable policy.
You should keep in mind that some of the riders we have discussed have higher deductibles than the one that will be listed on your policy. For example, a flood deductible might be 10% of your home's value.
Recommended Liability Limits
Now, let's review the recommended liability limits for your policy. In some cases, an insurance company or agent might pressure you to get more coverage than you need because it will result in a higher homeowners insurance premium. You can use this guide to help you evaluate the proper coverage.
Dwelling coverage protects your home and any attached structures, such as a porch or garage. You should have enough coverage to rebuild your home in the event of a total loss.
Other structures include fences, sheds, and any other structures on your property. Your coverage should be approximately 10% of your dwelling coverage.
Personal property coverage will protect you if your belongings are stolen or damaged in a covered event. Coverage should be approximately equal to 50%-70% of your dwelling coverage.
Liability coverage protects you if you injure a person or their property. In most cases, coverage limits should be between $100,000 and $500,000.
Additional living expenses should be covered in the event you can't live in your home due to damage. Your limit should be approximately 20% of your dwelling coverage.
Medical payments are covered to help protect you if someone is injured on your property. In most cases, coverage is limited to $1,000 to $5,000.
All told, this works out to coverage of about two times the cost of rebuilding your home plus the liability and medical coverage.
Riders and Add-Ons
Finally, you'll need to factor in the cost of add-ons and riders. Because additional coverage depends heavily on where you live and what you own, we can't give you an estimate of what you need. However, there is one thing we should clarify.
You'll need to understand what is covered when it comes to your personal property. In most cases, scheduled valuables are covered based on their actual cash value. Since many items depreciate with time, the ACV may not cover the true replacement value of your belongings. You'll need to keep that in mind.
What Do Lenders Require in Terms of Homeowners Insurance for a Mortgage?
Your insurer will make coverage recommendations, but you'll need to balance those against your mortgage lender's requirements.
Most lenders provide their prospective borrowers with a document indicating minimum homeowner insurance requirements. For example, there are minimum insurance carrier ratings for the insurance company, as well as specific language regarding the loss payee clauses for the lender. In most cases, your lender will require coverage that will allow for your home to be completely rebuilt. They may base their estimates on the square footage of the home, the type of home you're buying, the local building cost, and the purchase price. If an appraisal is completed in connection with your mortgage loan, the appraiser will list a replacement cost that the lender will rely on to ensure proper replacement cost coverage. They do this because until your mortgage is paid in full, they own your home and want to protect their asset.
In addition to the dwelling coverage as specified above, you'll also need liability coverage. Most lenders require a minimum of $100,000, but some may require more.
As a rule of thumb, lenders don't generally care about coverage for additional structures on the property or your personal belongings. You'll need to determine what coverage is necessary for those things.
Buying homeowners insurance is a requirement before you close on a home. We recommend working with your real estate agent to find a highly-rated carrier and obtain the coverage you need to protect your family, your investment and your lender.
Are you ready to achieve your dream of homeownership? Click here to set up a meeting with SIRVA Mortgage. We're here to help!