What Affects Homeowners’ Insurance Rates

Factors that affect homeowners' insurance rates

According to Bankrate, the average cost of homeowners’ insurance in the United States for $250,000 in dwelling coverage is approximately $1,400 per year. Your rate could differ since rates are typically calculated based on various home insurance cost factors.

Other well-known factors, such as its location, also impact your rate. However, there are other, lesser-known factors that affect rates as well. These include the type of claims you have filed, or how close you are to a fire station. These may affect your insurance premiums as well as your eligibility with some companies. Understanding what factors are used to determine your rates is helpful in determining what homeowners’ insurance company and coverage options are right for you.

WHAT IS DWELLING COVERAGE

Dwelling coverage is the portion of your homeowners insurance policy designed to cover your home’s structure. You may be asked to choose whether you want this coverage at replacement cost value or actual cash value. This may impact your premium. Replacement cost value provides coverage to rebuild your home and replace your belongings at today’s costs. Actual cash value factors in depreciation and pays out to rebuild or replace items at their current value. Choosing replacement cost value will likely increase your premium but will provide more financial protection in case of a covered event.

FACTORS THAT IMPACT YOUR HOMEOWNERS’ INSURANCE RATE

Risk Assessment
A risk profile conveys the likelihood your property will experience a covered event. If you live in an area where the chance of a claim is higher, your home insurance rates will likely be higher. If your house is located in an area with a higher history of negative events, such as vandalism, theft or weather-related events, you may experience a higher premium. Location is also often used when determining replacement costs for your home. This is because construction costs, including labor and materials, vary depending on region.

Physical Attributes
Physical attributes of your home affect your homeowners’ insurance premium. This includes factors like the age of your home, structural materials used and square footage.

Claims History
Insurance companies often consider any previous claims you have filed within a certain timeframe. They generally assume that homeowners who file claims are more likely to file future claims. If you have a history of filing insurance claims, insurance companies may consider you a greater future claims risk. This is true even if the dollar amount of your previous claims is small. This may include your claims history at both your current and prior properties. Therefore, even if you’re insuring a new home, your prior claims history from other homes may impact your new policy and affect your rates.

Other Factors
Marital status, age of home and your level of deductible also affect your rate. Typically, the older your home is and the lower your deductible is will increase your rates. Insurance companies differ with how they treat marital status. It is good practice to check how that factor affects your rates when picking an insurance company. In many states, your credit score can affect home insurance rates. However, in California it is no longer legal to do so.

SURPRISING RATE IMPACT FACTORS

Distance from Water
The closer a home is to the coast, the more likely it is to experience flooding or hurricane damage. This tends to increase the cost of insurance. Flood zones are important determinants in whether or not you should have flood insurance. If you have a federally-backed mortgage, like an FHA loan and your home is in a high-risk flood zone, you’re required to have flood insurance.

Distance from a Fire Station
The premiums you pay for home insurance are likely to be impacted by how close your home is to a fire department and fire hydrant. The closer you are to a fire station and hydrant, the greater the likelihood a fire can be extinguished quickly. This reduces the risk for severe damage, and/or the complete destruction of your home. The insurance industry generally uses the Fire Suppression Rating Schedule (FSRS) from the Insurance Services Office (ISO) to determine your home’s fire risk.

Dog Breeds
Having pets may also impact your rates or even your eligibility with some insurance companies. This is especially true for certain dog breeds and exotic animals. Some companies raise your rates to account for an increased ‘bite risk.’ Moreover, a bite history could also raise your rate or ability to get coverage, even if your dog isn’t a ‘restricted breed.

Attractive Nuisances
Attractive nuisances are items on your property that could be potentially dangerous and appealing, especially to children. This could include items such as swimming pools or trampolines. If your home has any of these, you may also see higher homeowners’ insurance rates or eligibility restrictions.

BEST HOMEOWNERS’ INSURANCE COMPANY

The best homeowners insurance company will likely not be the same for everyone. Most insurance professionals recommend starting by reviewing which carriers offer the coverage options you need, positive customer service ratings, strong financial strength ratings and discounts. From there, you can get quotes from top companies and compare to find which company might be best for your circumstances.

This post is just a snapshot of things that go into determining how much you will pay for insuring your home. There are many factors that affect homeowners insurance premiums, including ones that are not mentioned here. But one thing is certain, having adequate homeowners’ insurance is critical in protecting your family’s investment and having a place to live. If you haven’t checked your homeowners’ insurance policy recently, it is a good idea to do so. Find out if your insurance covers total replacement of your home at today’s costs. If your homeowners’ insurance rates were set at a level that simply pays out at rate where your home’s value was lower, you want to change that as soon as possible. If you don’t, any money you have saved in premiums may be more than lost when a catastrophic event forces you to rebuild.

And don’t forget having a recent “home inventory.” CLICK HERE to read our blog outlining Homeowners 2023 resolutions and steps you should take to make sure your belongings are also replaced in case of catastrophe.

PMI (Private Mortgage Insurance) Facts

When Can You Cancel PMI?

Learn about PMI facts. Did you know that when Private Mortgage Insurance (PMI) is no longer required, you can cancel it? Moreover, by cancelling it you will lower your monthly payment. The PMI Cancellation Act provides for that removal. The borrower may request in writing when the loan balance is 80% of the original purchase price or value. Of course, the borrower must be current on payments for termination to be allowed.

There are other important criteria you must meet if you want to cancel PMI on your loan:

  • Your request must be in writing.
  • You must have a good payment history and be current on your payments.
  • Your lender may require you to certify that there are no junior liens (such as a second mortgage) on your home.
  • Your lender can also require you to provide evidence (for example, an appraisal) that the value of your property hasn’t declined below the original value of the home. If the value of your home has decreased below the original value, you may not be able to cancel PMI at this time.

When Must the Lender Remove PMI

The lender must remove the PMI when the unpaid balance reaches 78% of the original value of the secured property. In addition, the lender or servicer must end PMI the month after the midpoint of the mortgage term is reached.

Other PMI Facts

Lenders may agree to terminate coverage wen the borrower’s equity reaches 20%, but the policies and procedures for cancelling or terminating PMI coverage vary widely among lenders.

VA mortgages do not have private mortgage insurance.

FHA mortgages require Mortgage Insurance Premium, MIP, which is required for the life of the mortgage for loans after June 3, 2013, when the loan-to-value percentage is greater than 90%.

Find out more about cancelling your PMI from the US Consumer Finance Protection Bureau by CLICKING HERE.

You may not be sure if you can cancel your PMI monthly payments. Consult your real estate professional, or contact Sound Investments, Inc. Get help understanding whether you can cancel PMI or not, and what the impacts to you may be.

What is Private Mortgage Insurance

What is Private Mortgage Insurance

Private mortgage insurance, also called PMI, is a type of mortgage insurance often required to pay for if you have a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan.

PMI is handled by the lender and provided by private insurance companies. PMI is usually required when you have a conventional loan and make a down payment of less than 20% of the home’s purchase price. It is also usually required when you’re refinancing a conventional loan with equity < 20% .

How do I pay for Private Mortgage Insurance?

There are several different ways to pay for PMI. Some lenders may offer more than one option, while other lenders do not. Before agreeing to a mortgage, ask lenders what choices they offer.

The most common way to pay for PMI is a monthly premium.

  • This premium is added to your mortgage payment.
  • The premium is shown on your Loan Estimate and Closing Disclosure on page 1, in the Projected Payments section. You will get a Loan Estimate when you apply for a mortgage, before you agree to this mortgage.
  • The premium is also shown on your Closing Disclosure on page 1, in the Projected Payments section.
  • Sometimes you pay for PMI with a one-time up-front premium paid at closing.
  • This premium is shown on your Loan Estimate and Closing Disclosure on page 2, in section B.
  • If you make an up-front payment and then move or refinance, you may not be entitled to a refund of the premium.
  • Sometimes you pay with both up-front and monthly premiums.
  • The up-front premium is shown on your Loan Estimate and Closing Disclosure on page 2, in section B.
  • The premium added to your monthly mortgage payment is shown on your Loan Estimate and Closing Disclosure on page 1, in the Projected Payments section.

Lenders might offer you more than one option. Ask the loan officer to help you calculate the total costs over a few different timeframes that are realistic for you.

What factors should I consider when deciding whether to choose a loan that requires PMI?

Tip

You may be able to cancel your monthly mortgage insurance premium once you’ve accumulated a certain amount of equity in your home. Learn more about your rights and ask lenders about their cancellation policies.

Like other kinds of mortgage insurance, PMI can help you qualify for a loan that you might not otherwise be able to get. But, it may increase the cost of your loan. And it doesn’t protect you if you run into problems on your mortgage—it only protects the lender. Find out more about PMI from the US Consumer Finance Protection Bureau by CLICKING HERE.

Lenders sometimes offer conventional loans with smaller down payments that do not require PMI. Usually, you will pay a higher interest rate for these loans. Paying a higher interest rate can be more or less expensive than PMI. It depends on a number of factors, including how long you plan to stay in the home. You may also want to ask a tax advisor about whether paying more in interest or paying PMI might affect your taxes differently.

Borrowers making a low down payment may also want to consider other types of loans, such as an FHA loan. Other types of loans may be more or less expensive than a conventional loan with PMI. This depends on your credit score, your down payment amount, the particular lender, and general market conditions.

You may also want to consider saving up the money to make a 20 percent down payment. This eliminates the need for PMI with a conventional loan. You may also receive a lower interest rate with a 20 percent down payment.

Ask lenders to show you detailed pricing for different options so you can see which option is the best deal.

Warning: Private mortgage insurance protects the lender—not you. If you fall behind on your payments, PMI will not protect you and you can lose your home through foreclosure.

Having an Up-To-Date Home Inventory

Is your home inventory up to date?

WHY YOU NEED AN UP-TO-DATE HOME INVENTORY

A current up-to-date home inventory of all the personal items you own is important. You may find that it may even be necessary. It is an enormous help if you are faced with filing a police report or insurance claim. In these cases, the homeowner is usually asked if they have a home inventory. If not, the homeowner must reconstruct one to estimate their loss.

TRY THIS EXERCISE

Imagine you are in this position. Would you be able to make an accurate list of your belongings and their value? As an exercise, pick a room of your home. While being in another room, list all your belongings and their value that are in the room. When you’re finished with the list, go into the room and check to see how you did.

This little exercise should demonstrate the difficulty of reconstructing an accurate list of your belongings. Moreover, depending on whether you missed a lot of items you could find that you aren’t adequately compensated by insurance when you try to replace your items. This demonstrates the importance of having an up-to-date home inventory. Not only will this help you purchase the right amount and type of insurance, having an accurate inventory makes filing a claim easier.

OTHER REASONS TO HAVE A HOME INVENTORY

An accurate accounting of your belongings helps you and your insurance agent determine that your belongings are properly insured. Another reason for having a home inventory is to create a maintenance calendar for your appliances. It can also help you declutter by getting rid of items no longer needed. Over half of households do not have a home inventory. Furthermore, the majority of those who do have them, haven’t updated them with new possessions purchased since it the original list was created.

The peace of mind having a current home inventory is a strong reason for making sure yours is up-to-date. It provides confidence that you keep your home and possessions financially organized and prepared. This should help if you need to prove the true value of your losses. It will also help you and your family return to your normal life after an unsettling event.

A HELPFUL WAY TO BUILD YOUR HOME INVENTORY LIST

Download our Home Inventory for more tips on creating one along with alternatives for documenting your belongings. It will allow you to take pictures and list individual items along with values. You can enter the information and images directly into the PDF so you can be stored safely in your online cloud storage once you are done.

Home Insurance and Mortgage Insurance

Young couple using digital tablet with their financial advisor in the office.

Many homeowners with mortgages pay for both types of insurance but only one of them protects the owner.

Homeowner’s insurance covers damage to your property and losses from fire, burglary, vandalism, and other named natural disasters. When an insured has a loss, they file a claim with the insurance carrier which would be subject to the deductible mentioned in the policy.

If the homeowner has a mortgage on the property, the lender will require that the borrower carry adequate insurance on the property and name the lender as an additional insured. This protects the lender that the home will continue to be sufficient collateral for the loan in case of a loss.

Mortgage insurance is not like homeowner’s insurance in that it is solely for the protection of the lender if the borrower defaults on the loan. Usually, lenders require mortgage insurance on any loan greater than 80% loan-to-value. Occasionally, they may require it on some loans less than 80% based on their underwriting requirements and possibly, from anticipated risk from the borrower.

VA loans do not require mortgage insurance. Conventional lenders must remove the mortgage insurance when the loan amortizes below the stated percentage. FHA loans require mortgage insurance for the life of the loan.

When a property appreciates so that when the owners refinance, the loan-to-value ratio is less than 80%, no mortgage insurance would be required. This can be a strong motivation for some owners to refinance to save the cost of the mortgage insurance.

Mortgage insurance premiums are not regulated by law like homeowner’s insurance is in most states. Most buyers are concerned about the interest rate on their mortgage, but few question the amount of the mortgage insurance premium.

The homeowner can select the carrier for his homeowner insurance, but the lender determines the carrier for the mortgage insurance. When you are interviewing lenders, the type of insurance that will be required and the price of the mortgage insurance should be included in the discussion.