When figuring how much house they can afford, homebuyers with little or no experience may focus solely on the principal and interest portion of their monthly payment. But house payments also include the cost of homeowners insurance. It’s important to research the cost of insuring your home early in the process to avoid unpleasant surprises down the road.
The four parts of monthly housing payments
When you make a monthly house payment, you’re actually paying for four things, known as PITI: principal, interest, property taxes and homeowners insurance. Home lending sites usually have “mortgage calculator” apps that allow you to figure out how much principal and interest you’ll pay each month. But you must research property taxes and homeowners insurance on your own. A home doesn’t fit within your budget unless you can afford each part of the monthly payment.
Consider homeowners insurance early on
That’s why it’s important when you’re shopping for a house to look into homeowners insurance early in the process. Many property and casualty insurers insure homes, so shop rates. In addition to the household names such as State Farm, Allstate, Farmers and Liberty Mutual, many other lesser-known insurers offer good coverage. Visit each of their websites, or go to one-stop comparison sites like www.esurance.com.
You can also call agents in your area. Insurance agents fall into two categories. Some agents work for one carrier such as State Farm. Then there are independent agents who act as brokers and can shop multiple companies to find you the best deal. Work with your agent to find good coverage at an annual and monthly cost you can afford.
Often insurance agents can work with homebuyers to adjust their deductibles or other factors so that the homebuyer’s monthly payment fits within the parameters for mortgage approval. If your insurer offers several types of insurance, you also may be able to lower the cost of your homeowners insurance by bundling it with other coverage, such as auto insurance.
Since homeowners insurance covers only your home’s structure, not the land your house sits on, tell the agent if a big portion of your home’s sales price stems from a large lot. Request a report on previous claims on the house you are buying through a national database called the Comprehensive Loss Underwriting Exchange (CLUE). Like a credit or medical report on a person, a property’s history can affect the rates to insure it. You can also see your own CLUE report to see if your personal history could affect your rates.
How homeowners insurance is priced
Insurance companies look at the history of losses in your area and divide that number into the total known value of homes to determine the cost of claims per $100,000 in value. This is called the “pure premium” cost to insure. Insurers add in the expected administrative costs of operating their company plus the desired profit, then determine rates based on these figures.
Like so many other aspects of real estate, location drives costs. Homeowners who live in Gulf Coast states, particularly Florida and Louisiana, pay the nation’s highest home insurance rates because of the risk of hurricane damage in their area. California residents pay higher rates because of the twin perils of earthquakes and wildfires. More tranquil regions pay lower premiums.
Other factors driving the cost of homeowners insurance include the age of the insured home, its size, the construction materials used, the home’s proximity to a fire station and the presence of smoke alarms.
It is important to know whether a house lies in a flood zone. Homeowners insurance does not cover most flood damage. To cover these claims, you must separately purchase flood insurance that the federal government underwrites, manages and sells through qualified agents.
Your insurance has two major categories of coverage: protection against damage to the property itself and liability protection should a guest be injured on your property.