How Are Homeowners Insurance Rates Determined
So what’s the driving force behind rates? According to Noah J. Bank, a licensed insurance broker with The B& G Group in Plainview, NY, it’s the likelihood a homeowner will file a claimthe insurer’s perceived “risk.” And to determine risk, home insurance companies give significant consideration to past home insurance claims submitted by the homeowner as well as claims related to that property and the homeowners credit. Claim frequency and severity of the claim play a considerable role in determining rates, especially if there’s more than one claim relating to the same issue like water damage, wind storms, etc., Bank says.
While insurers are there to pay claims, they’re also in it to make money. Insuring a home that has had multiple claims in the past three to seven years, even if a previous owner filed the claim, can bump your home insurance premium into a higher pricing tier. You may not even be eligible for home insurance based on the number of recent past claims filed, notes Bank.
The neighborhood, crime rate, and building material availability will all play a part in determining rates, too. And of course, coverage options such as deductibles or added riders for art, wine, jewelry, etc.and the coverage amount desiredalso factor into the size of an annual premium.
Home Insurance Settlement Options
Your insurance company will review your claim and decide how it will settle your claim.
When you make a claim, you’re always responsible for paying the deductible. The amount of money you get from your insurance company will depend on your insurance benefits.
Remember that the amount of your deductible may reduce the amount you get from a claim.
Compare Statewide Costs And Insurers
When it comes to insurance, you want to make sure you are going with a provider that is legitimate and creditworthy. Your first step should be to visit your states Department of Insurance website to learn the rating for each home insurance company licensed to conduct business in your state, as well as any consumer complaints lodged against the insurance company. The site should also provide a typical average cost of home insurance in different counties and cities.
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Homeowners Insurance And Your Mortgage
Whether youre a first-time home buyer or youre experienced in real estate transactions, the process of finding, exploring and negotiating for your new home is exciting. But once youve found a new place youll have some paperwork to manage.
Navigating that paperwork along with all of the requirements during a home sale can be confusing, especially when it comes to your mortgage and your homeowners insurance. But dont worry your mortgage lender and American Family Insurance agent are on your side to answer a wide range of questions. Lets break down the basics.
How Much Home Insurance Does A Mortgage Lender Require
Mortgage lenders require that you have homeowners insurance, but that’s usually not enough coverage. Here’s how mortgage companies figure out how much home insurance you need.
Your lender want to make sure that the home can be rebuilt in case of any damage. Almost all lenders will require that your home is insured and protected for 100% of its replacement cost.
They want you to have enough homeowners insurance to protect your home before taking out a mortgage. It will help you pay for the cost of rebuilding in case of fire or storm damage.
There are many factors that helps to determine the type of home insurance you need, such as your location. A lender will assist you by providing a list of coverages they require for the loan.
“There isn’t a way to say, ‘this is a dollar amount minimum’ because of the wide variations of risk factors,” Phillips said about a lack of standard minimum requirements.
- If you’re planning to buy a new home with the mortgage, do not forget to buy insurance before closing on your house.
- Homeowners insurance is a requirement for all lenders and the rates vary according to your location. In most cases, you’ll have to insure your home at 100% of its replacement value.
- If you have paid off your home, then it is less likely that a state will require home insurance. But if you a have mortgage, lenders will require you to have dwelling and liability coverage.
Required perils
- Fire and lightning
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When Refinancing Do I Need To Keep The Same Homeowners Company
While in the process of refinancing your home, you may be wondering whether or not you need to stick with the homeowners insurance company you used on your previous loan. Luckily, the answer is no. When it comes to insurance, the ball is in your court. There is no need to be loyal to your previous homeowners insurance company. In fact, refinancing can be a great reason to reassess and find a company that might work better for you.
Most homeowners fall into the trap of just going with the motions, especially during an already stressful refinancing experience. However, choosing to branch out to different insurance companies could potentially save you hundreds of dollars. While refinancing, reach out to agents from several different companies. You can also go with an independent agent who works with a myriad of insurance companies. Compare and contrast policy coverage options as well as monthly premiums. Is one company going to give you better coverage for a lower price? How about more robust coverage for the same price youre paying now? These are all things to consider.
What Is Flood Insurance
Flood insurance is similar to homeowners insurance except that it only covers damage due to flooding. Flood insurance offered by insurance companies is also called private flood insurance. The Federal Emergency Management Agency also offers flood insurance through the National Flood Insurance Program . FEMA states that an event is qualified as a flood if “an excess of water on land that is normally dry affects two or more acres of land or two or more properties.”
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How To Set Up An Escrow Account
When an escrow account is required, the lender will set it up for you. If an escrow account isnt required, the lender will usually give you the option to open one.
Lenders require escrow accounts for numerous reasons. In 2013, the Consumer Financial Protection Bureau issued a rule under the federal Truth in Lending Act that requires lenders to collect escrow payments for at least five years on higher-priced mortgage loans . HPMLs are loans with an APR thats a certain number of percentage points above average prime offer rates , which is an average of mortgage interest rates, fees, and other terms for highly qualified borrowers. HMPLs include:
- First-lien mortgages: With a first-lien mortgage, the lender is the first in line to receive payment following foreclosure. A first-lien mortgage is considered higher-priced if its APR is at least 1.5 percentage points higher than the APOR.
- Jumbo loans: First-lien jumbo loans are higher-priced if their APR is at least 2.5 percentage points higher than the APOR.
- Subordinate-lien mortgages: Sometimes called junior-lien mortgages or second-lien mortgages, subordinate-lien mortgages are second in line for payment following foreclosure. These types of loans are considered higher priced when their APR is at least 3.5 percentage points higher than the APOR.
A lender may also require an escrow account if you put less than 20% down when you buy your home.
What Is Not Protected By Most Homeowners Insurance
There are some circumstances that are left out of many homeowners insurance policies. Some of these exclusions are
- Earthquakes
- Damage caused by pests like termites
- Corrosion or rot
Mold is only covered if it is the result of a problem that is already covered under your policy. Higher risk items are often not included in basic homeowners insurance coverage either. Artwork, jewelry, or structures like a swimming pool often cost more to protect. You can keep track of what is and isnt covered on your policy on the homeowners insurance declaration page.
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What Is Hazard Insurance
Hazard insurance generally refers to coverage for the structure of your home only. Other kinds of damage will be covered by other coverages within your homeowners insurance policy. Hazard insurance doesnt generally refer to the coverage that protects you for injuries incurred by you or your guests following an accident may be covered by liability coverage.
The reason hazard insurance is a common term is actually because of lenders. Your mortgage loan provider may require hazard insurance at minimum before they will issue you a loan, because that is the only portion of the homeowners insurance policy directly related to the home structure itself. This may create the misconception that hazard coverage can be purchased separately from homeowners insurance, which is not accurate. If your lender has specified that you need hazard or dwelling coverage, just know that generally purchasing a homeowners policy will satisfy their requirements.
Is Homeowners Insurance Included In Your Mortgage
Some homeowners may think their home insurance is included in their mortgage because they make a single monthly payment that covers both their homeowners insurance premium and their monthly mortgage payment. However, homeowners insurance is not included in your mortgage. It is an insurance policy separate from your mortgage loan agreement. Even when your loan and insurance costs are bundled into a single monthly payment, your homeowners insurance premium goes to your homeowners insurance company and your mortgage lender receives your mortgage payment.
Your mortgage lender may set up an escrow account3 from which to pay your homeowners insurance and property taxes. This helps to ensure that you have enough money to pay both important expenses on time. Typically, the bank collects that money as part of your monthly mortgage payment, places the funds in escrow and then makes a payment to your homeowners insurance company on your behalf every six months or every year.
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Homeowners Insurance Vs Private Mortgage Insurance
Your lender may also require you to pay private mortgage insurance . PMI protects the lender if you stop making your mortgage payments. Collecting insurance and tax payments through an escrow account protects the lender from tax liens and uninsured losses, while PMI protects the lender if you default on your mortgage.
Lenders typically require PMI when you make less than a 20% down payment on a conventional loan or refinance a property that has less than 20% equity. If required, the lender will arrange PMI coverage through an insurance company.
What Kind Of Coverage Do Lenders Require
Just as your old lender likely required a policy that could cover up to 80 percent replacement value on your home, your new lender during the refinancing policy will want much of the same. Most homeowners policies are known as HO-3 policies. These policies protect your home and personal belongings against fires, accidents, theft, and natural disasters. Keep in mind, most standard policies will not protect from floods or earthquakes, though you may tack that coverage on for an additional price. Different lenders do require different things. Your new lender may have laxer or more stringent requirements. For example, if you live in a flood zone, your new lender may require that you take on separate flood insurance. The goal is for your lender to feel as if the investment is protected in the event of a disaster or issue.
Keep in mind that whatever policy you do choose, it should be enough to cover the costs of completely rebuilding or furnishing your home. Personal belongings and the quality of appliances, flooring, and fixtures should also be taken into account. Note any unique details of your home such as expensive moldings and add those costs into your estimate. As mentioned above, speak directly to your lender during the refinancing process to ascertain that you are getting adequate coverage for loan approval. Typically, the amount must be at the very minimum, enough to cover the total loan amount. However, the goal should be to cover the cost of replacement on a whole.
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Maybe But You Don’t Want Toand Here’s Why
Legally, you can own a home without homeowners insurance. However, in most cases, those who have a financial interest in your homesuch as a mortgage or home equity loan holderwill require that it be insured. And, for your own ongoing financial protection, you’ll want your home to have adequate homeowners coverage, as well.
What Is Included In Your Mortgage Payment
Mortgage payments can include money for your principal, interest, taxes and insurance .
Here’s a closer look at each part of your PITI:
- Principal: The mortgage’s principal is the amount you borrowed. Part of each loan payment pays down the principal, allowing you to pay off the loan over time.
- Interest: Part of your payment will also go toward the interest that accrued since your previous payment.
- Taxes: Required property tax payments that you may pay to your local government.
- Insurance: Depending on your down payment amount and mortgage type, you may pay one or more different types of insurance as part of your monthly payment:
- Homeowners insurance: Homeowners insurance can protect you from covered incidents such as windstorms, theft, vandalism and liability lawsuits.
- Mortgage insurance: Mortgage insurance protects the lender rather than the homeowner by paying the lender if you default on the loan. You might be required to pay for mortgage insurance depending on your down payment and the type of mortgage you have.
- Additional insurance: Other types of insurance may be required based on the home’s location, such as flood or hurricane insurance. There are also optional policies, such as earthquake insurance.
Common housing expenses that aren’t part of your mortgage payment include utility bills, maintenance and HOA fees.
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Transcript: The Components Of A Mortgage Payment
A mortgage payment is typically made up of four components: principal, interest, taxes and insurance.
The Principal portion is the amount that pays down your outstanding loan amount.
Interest is the cost of borrowing money. The amount of interest you pay is determined by your interest rate and your loan balance.
Taxes are the property assessments collected by your local government. Lenders typically collect a portion of these taxes in every mortgage payment and hold the funds in an account, called an escrow account, until they are due.
Insurance offers financial protection from risk. Like property taxes, homeowners insurance payments are typically held in an escrow account, and then paid on your behalf to the insurance company.
Two main types of insurance can be included as part of your mortgage payment.
Homeowners insurance is required financial protection you must maintain in case your property is damaged by fire, wind, theft, or other hazards. Depending on your geographic location, you may be required to get additional flood insurance.
Mortgage insurance protects your lender in case you fail to repay your mortgage. Whether or not mortgage insurance is required usually depends on the size of your down payment and other circumstances.
In the early stages of your mortgage term, only a small portion of your monthly payment will go toward repaying your original principal.
As you continue to make payments through the years, a greater portion will go to reducing the principal.
Is Homeowners Insurance Included In A Mortgage
No, homeowners insurance isnt included in your mortgage. However, you may be able to pay your homeowners insurance premiums through your mortgage through a process called impounding.
Its an account set up by your mortgage lender that ensures homeowners insurance is paid on time each month. Mortgage companies usually deviate this account to individuals who put down less than 20 percent on their home.
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Other Insurance Requirements For Your Home
A mortgage lender may require additional coverage if your home is considered a risk. As an example, if your home is located in a flood zone or in an earthquake prone area you may have to put flood or earthquake insurance in place. Here are a few common additional coverages a lender may require:
Flood insurance: Standard homeowners insurance does not protect against flood or earthquake damage, but if you live in a flood zone, your mortgage company will likely require that coverage. Flood insurance policies can be purchased through the National Flood Insurance Program or private insurers. The cost of a policy varies dramatically depending on your properties risk factors. According to data from FEMA, the average cost of flood insurance is about $700 a year but that figure can go up dramatically if you live oceanfront or on the coast.
Windstorm insurance: While wind damage is covered by most insurance policies, there are insurers in certain areas that may exclude wind damage from a standard policy. If this is the case, you will have to purchase an additional windstorm policy that would fill this coverage gap. Windstorm policies almost always come with a percentage deductible.
Additional endorsements: Your lender may require one or more additional endorsements to your insurance policy. A common request is water backup coverage which helps protect your home from water damage due to overflowing sewers or drains.
Factors That Determine Homeowners Insurance Cost
How much you pay for insurance depends on a few different factors. Here are just a few of the most common considerations insurance providers use when they calculate your rate.
Condition And Age Of Your Home
Insurance companies may charge higher premiums for older homes or fixer-upper homes that havent been well-maintained.
Location
Insurance premiums vary widely by state. Expect to pay more for homeowners insurance if you live in an area thats prone to wildfires, flooding or other natural disasters. On the other hand, you can expect to pay less if you live close to a police station or fire department.
Just like with a loan or credit card, insurance companies offer lower rates to people with high . By taking some time to raise your credit score, you can actually lower your premium.
Deductible
Your deductible is the amount that you pay when you make a claim before your insurance kicks in and covers the rest of the bill. Youll pay more in premiums if you choose a lower deductible.
Extra Structures On Your Property
The more structures you have on your property, the more of a risk you pose to insurance companies. You may pay more for your insurance if you have a fence, tool shed or pool.
Dog Breed
Some insurance companies won’t cover homes where certain dog breeds live. These can include pit bulls, German shepherds and rottweilers. Even if your insurance company doesnt ban certain breeds, they may still charge you more if you own an aggressive breed of dog.
Claims History
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