How Homeowners Insurance Premiums Are Calculated
Guest post by Arthur Murray, HomeInsurance.com
It’s unlikely that you’d buy a new car without at least considering its gas mileage, so why would you buy a house without considering what it costs to insure? Many buyers don’t think about home insurance until the final days before they are scheduled to close, and then scramble to secure coverage – sometimes from the first provider they ask – to make sure everything is ready for signing day. That can result in paying more than you must for coverage. Keeping your insurance needs in mind as you shop for a home is a smarter strategy and can also be a useful filter for you. If you fall in love with a home but realize it’s on a flood plain, remember the potential increases to your home insurance, and how that will affect the overall costs.
Insurance providers are in the business of evaluating risks. The fewer risks your house poses, the less expensive it is to insure, and the lower the premium for you. Here are the factors that go into determining how much you’ll pay for home insurance:
You’ve heard about the importance of location from your real-estate agent. But it matters to your insurance agent as well. Here’s why; the location reveals a lot about how much risk you pose as a policyholder. A house in a densely populated area likely will cost more to insure; just think about how much greater the risk of fire damage is when homes are built extremely close to one another. Another thing to consider when you’re looking at houses is how far they are from fire hydrants and departments because it can make a big difference on your home insurance premiums.
Location also matters if you’re in a high-crime area. Your provider will set premiums higher to account for break-ins, vandalism, and other crime-related claims. The location of the home also helps determine the potential risk from severe weather like tornadoes and hurricanes. However, you’ll need separate policies for floods, earthquakes and mudslides, as these aren’t typically covered by standard home insurance.
Certain characteristics of your home also affect your premiums. Starting at the top, the age and type of your roof gives an insurance provider insight into your potential risk. Newer is better, especially if it’s less than 10 years old. Some providers offer credits of up to 10% for “impact-resistant” roofing materials like steel and aluminum. Similarly, providers will look at your home’s electrical system; circuit breakers are likely to cost you less than fuse boxes.
The value of the home itself also will play heavily into the premium. Dwelling coverage is the part of home insurance that pays to rebuild your house if it’s damaged or destroyed by a covered peril such as fire or wind. That’s basically determined by multiplying the square footage of your home by local construction costs (there’s that location factor, again). The higher that value, the higher your premium will be.
In addition to covering the structure of your house, typical homeowners insurance includes protection for the contents of the home
and liability protection in case a visitor is injured on your property. Coverage starts at $100,000, but you may want to consider increasing that to $300,000 or $500,000, which will cost more per month. If you own high-value items like jewelry, fine art and electronics, you also might want to increase the contents coverage in your policy, since payouts are limited for those items.
Swimming pools, trampolines, and certain dog breeds can also result in increases to your premium.
Your credit score
It likely comes as no surprise to you that your credit score will affect your mortgage. If you have perfect credit, you’ll probably get a lower interest rate. But you might be surprised to learn that it also affects how much you’ll pay for home insurance.
Insurance companies use your credit score to evaluate the risk you pose of filing claims. The better your credit, the lower your premium.
They also look at your claims history. If you’ve made several home insurance claims in the past, they consider you more likely to file them now. If you haven’t filed a claim within the past 10 years, your premium could be up to 20% lower.
Discounts at work
If it seems like every facet of a house and what goes in it drives up the home insurance premium a bit more, take heart. There also are ways to cut how much you’ll pay for coverage and some can factor into your home search.
They’re called discounts, and home insurance providers grant them when features of a house – or its owners – reduce the risk of claims. For example, homes with smoke detectors can get a discount of 5% on premiums. An alarm system can get a discount of up to 15%. Note that discounts vary by provider and even by state (location, again).
Bundling coverage and buying home and car insurance from the same provider can also lower your premium by as much as 20%.
One other way to lower your monthly payments is by setting your deductible higher. The deductible is the amount of a claim you pay out of pocket, usually before your provider kicks in. When you accept greater responsibility by increasing your deductible, your carrier lowers the premium you pay each month. However, make sure you keep enough money on hand to meet this higher deductible should you need to file a claim.
Bottom line is …
Your lender will require you to have home insurance in place before signing off on your mortgage. Isn’t it better to go into the process aware of what you’re going to pay? Otherwise, it’s like that gas-guzzling car; what can seem like a good deal on the lot doesn’t look so good after a few trips to the pump.
That’s why you should make sure you get all the mileage you can out of your home buying budget, including how much you’ll pay for home insurance.
This article was written by Arthur Murray, contributor to the HomeInsurance.com blog. The HomeownersInsurance.com blog serves as a resource center for insurance consumers and homebuyers across the country.Source: www.redfin.com