Understanding Homeowners Insurance: Costs, Coverage, and Savings Tips

Owning a home is a rewarding experience, but it comes with various financial responsibilities. Besides mortgage payments, property taxes, and maintenance expenses, homeowners must also budget for homeowners insurance. On average, homeowners insurance costs $2,071 annually, according to Insurify. However, the cost can vary widely based on several factors, including the type and amount of coverage, the cost to rebuild your home, and the most common risks in your area. Here’s what you need to know about home insurance costs and tips for reducing your premiums.

How Much Does Homeowners Insurance Cost?

Based on national averages, homeowners pay a little more than $117 per month for home insurance. However, your costs may be higher or lower depending on factors such as your coverage level, construction costs in your area, your home’s age, and any history of previous insurance claims.

Weather is a major influence on homeowners insurance premiums. Costs are typically higher in areas prone to natural disasters; the growing frequency of severe weather events has spurred soaring insurance costs in some areas. For example, in Florida, homeowners insurance premiums average $4,231 annually, according to Insurance Information Institute (III) estimates. In contrast, in Oregon, home insurance premiums average just $793 per year, NAIC data shows.

What Does Home Insurance Cover?

A standard homeowners insurance policy (known as HO-3 in the insurance industry) usually includes four types of coverage:

• Dwelling or structure coverage: Pays the expenses of rebuilding or repairing your home’s physical structure if a covered event, such as a fire, windstorm, theft, vandalism, or lightning, damages or destroys it. This coverage may also pay to repair or rebuild other structures on your property, such as a detached garage or shed.
• Personal property coverage: Pays the cost of replacing belongings destroyed or damaged by a covered event.
• Liability insurance: Covers the medical and legal costs if a visitor to your property is injured.
• Alternative living expenses (ALE) insurance: Pays for you to stay elsewhere if the insurance company declares your home uninhabitable while covered repairs take place.

Depending on your location, you may wish to buy extra coverage to protect against the risk of earthquakes, floods, sinkholes, and certain types of water damage. These perils aren’t covered by standard home insurance.

What Affects Home Insurance Rates?

Home insurance premiums are affected by a variety of factors, some of which are under your control and some of which are not. Here are the common factors influencing your home insurance rates:

Type and Level of Coverage

A bigger home generally requires more coverage because it costs more to rebuild after a loss. The amount and type of coverage you purchase also impacts your home insurance premiums. You’ll have the option to choose the dollar amount of coverage for each of the four standard elements of home insurance; the more coverage you opt for, the more you’ll pay. Adding riders or endorsements to your insurance policy or purchasing standalone coverage, such as for earthquake or flood insurance, will also increase your costs.

Cost of Construction and Materials

Your homeowners insurance should provide enough coverage to rebuild your home if necessary. You can estimate the cost of rebuilding by multiplying your area’s average building cost per square foot by the square footage of the house. Construction and materials costs may be higher in some parts of the country than others. High-end materials, specialized construction, or custom-designed homes typically cost more to rebuild or replace, which means higher premiums.

Age and Condition of Home

Many insurers require a home inspection before issuing coverage. If your home is older or hasn’t been well maintained, insurers may perceive a higher risk and raise your premiums. For example, outdated wiring could increase the chance of a fire. Your insurance company might also make you buy special coverage or insurance riders.

Location of Home

Do you live in a region where floods, wildfires, tornadoes, or other severe weather events are common? Insurance companies typically charge higher rates to insure homes in these areas.

Previous Insurance Claims

Filing an insurance claim can cause your rates to rise, so it’s important to carefully weigh the potential payout against the potential costs. Insurance companies search the Comprehensive Loss Underwriting Exchange database to see if claims have been filed on your home in the past seven years. Even claims filed by a former homeowner could mean paying more for home insurance.

Whether You Have a Mortgage

Mortgage lenders generally require borrowers to keep at least enough homeowners insurance to pay off the loan. Keep in mind that you may need more than that to rebuild your home. If you own your home outright, the amount of coverage you choose is up to you.

Property Risks

You might pay more for home insurance if your property has elements that increase the likelihood of personal injury to visitors or damage to your home. For example, a swimming pool, jungle gym, or treehouse could pose risks to children, while a wood-burning furnace could increase the risk of fire. Owning dogs that are considered dangerous can also raise your insurance rates.

Your Deductible

Every homeowners insurance policy has a deductible—the amount that’s subtracted from your claim payout. This amount usually starts at $500 or $1,000. Usually, lower deductibles mean higher premiums, and vice versa.

Your Credit-Based Insurance Scores

Insurance carriers may check your credit-based insurance score when evaluating your insurance application and determining your home insurance rates. This practice isn’t legal in all states, but if it’s allowed in your location, a lower credit-based insurance score could mean higher insurance costs.

How to Lower Home Insurance Rates

Fortunately, there are steps you can take to minimize home insurance costs while still getting the coverage you need:

Raise Your Deductible

Increasing your deductible can reduce your home insurance premiums. However, since this will reduce your claims payout, it’s important to make sure you can cover any extra costs if you have a loss.

Bundle Home and Auto Insurance

Purchasing multiple types of insurance from the same insurance company—a practice known as “bundling”—can mean significant savings.

Reduce Risk

Enhancing your home’s safety with features such as a security system or locking pool fence can lower your premiums. Check with your insurer to see which safety modifications will have the biggest impact.

File Claims Sparingly

Homeowners insurance is meant to cover major losses, not minor repairs. Before filing a claim, check your coverage, consider your deductible, and evaluate whether you could cover the cost out of pocket.

Improve Your Credit Score

Credit-based insurance scores differ from consumer credit scores but are based on some of the same factors. In states where credit-based insurance scores are a factor, having a good credit score can help lower your insurance premiums.

Investigate Discounts

In addition to discounts for bundling, insurance companies may offer discounts on home insurance for belonging to an alumni organization, professional association, or other group. You might also qualify for discounts if you’re retired, are claim-free for a certain number of years, or work for a certain employer.

Shop Around

Compare prices for the same type and amount of home insurance from various insurance providers. You can do this by contacting an insurance agent or going online. Whether you get price quotes from a traditional insurance company or an online insurance marketplace, taking some time to shop around can help you find the perfect combination of coverage and affordability.

The Bottom Line

Home insurance is a necessary expense to safeguard your precious property. By understanding your coverage needs and comparing prices from a variety of insurers, you can help ensure it’s affordable. Paying bills on time, keeping credit utilization to a minimum, and paying down debt can help improve your credit score. It may also positively affect your credit-based insurance score, which could lower your insurance premiums. Also, consider signing up for Experian Boost®, which can help boost your credit score by adding on-time rent, cellphone, and utility payments to your Experian credit report.

For any mortgage service needs, O1ne Mortgage is here to help. Call us at 213-732-3074 to speak with one of our expert loan salespersons. We are committed to providing you with the best service and helping you find the right mortgage solution for your needs.