Homeowners insurance premium, explained

When you take out a mortgage on a new house, your lender will likely require you to purchase homeowners insurance ahead of closing. If this is your first rodeo, then terms like “insurance premium” may come off as confusing, but it’s actually a fairly simple concept. In this guide, we’ll walk you through the ins and outs of your homeowners insurance premium, including what it is and how it's determined.

What is a homeowners insurance premium?

A homeowners insurance premium is the amount you pay every year to keep your policy in force. Insurance premiums are generally paid in one of two ways: either directly to the insurance company with one-time or recurring payments, or as part of your monthly mortgage payment. 

Homeowners insurance premiums are calculated based on multiple factors related to you and your home. Some factors are related to the home itself, like its location, square footage, the year it was built, and number of bathrooms. Other factors that impact your insurance premium have to do with you directly, like your credit score, claims history, marital status, and whether or not your mortgage is paid off.

If you stop paying your premiums, you’ll typically have 30 days to pay down the balance before your homeowners policy lapses, or is canceled. Having missing payments or policy lapses on your record can also lead to a higher home insurance premium going forward.

How much is the average homeowners insurance premium?

The average annual cost of homeowners insurance in the U.S. is $1,249, but the price of coverage will vary depending on multiple factors related to you and your home, including its location. [1]

How is your homeowners insurance premium calculated?

There are several factors that impact your annual home insurance premium. Some of these you can control, and some you cannot. Understanding how your insurance company sets its rates will go a long way in helping you understand your bill and what you can do to cut insurance costs. 

Here are the biggest factors impacting your homeowners insurance rates.

Your home’s location

One of the biggest indicators of insurance cost is the location of your home. If your home is in a wildfire, tornado or tropical storm-prone area, it is generally going to have higher premiums than if it is in an area with a relatively milder climate.

Your home’s square footage, age, and build

Your home’s size, architectural style, and the year it was built are all calculated into your home insurance premium. Homes that are larger, older, or constructed with materials more likely to incur damage usually cost more to insure.

Your insurance score

Another factor that determines your homeowners insurance premiums is your insurance score, or your credit-based insurance score. Your insurance score is a calculation of some (but not all) factors in your credit history as a way to measure how likely you are to file a claim. The higher your credit score is, the lower your homeowners insurance premium will be.

Your claims history

If you’ve never filed a home insurance claim or you’ve only filed weather-related claims, your premiums likely won’t be impacted. But if you’ve filed multiple claims, or you had a loss caused by theft, fire, or interior issues like plumbing or bad wiring, that will likely cause your premiums to go up.

Your deductible amount

Your policy deductible is the amount you’re responsible for paying out on a claim before your insurance kicks in to cover the remainder of the loss. Lowering your home insurance deductible is probably the easiest and most immediate way to lower your insurance premium. Just be mindful that a higher deductible means more out-of-pocket expenses if something bad happens.

Home insurance discounts

Insurance companies also offer several home insurance discounts that can keep your rates down. If you outfit your home with one or more of the following features, let your insurance company know — you may see a sizable discount at renewal.

• Smoke alarms

• Burglar alarms

• New roof

• Deadbolts on doors

• Fire extinguishers

• Storm-proofing your windows, doors, and roof

How to pay homeowners insurance premiums

When you take out a mortgage on a home and your down payment is less than 20% of the home's sale price, your lender may require that you escrow your property taxes and home insurance premium with your mortgage payments. That means that every month when you make a mortgage payment, a portion goes into your escrow account, which is a bank account set up by your lender to pay for insurance and taxes.

You may also have the option of paying for homeowners insurance directly, without an escrow account. This could be because your mortgage company didn’t require you to open an escrow account, or maybe you dropped your escrow account because you noticed your lender was routinely miscalculating insurance and taxes and overcharging you. If you do pay your premiums directly, you can typically pay the following ways:

• Automatic charge to your debit or credit card

• One-time charge to your debit or credit card

• Bank account withdrawal

• Mailing a check

• At your insurance company’s local office

Most insurers will give you the option of paying your premiums month-to-month, albeit at a slightly inflated price. Paying your premiums for the year in full usually gets you a solid discount.

What happens if you don’t pay your home insurance premiums?

If you don’t pay your premiums, your insurance company is required to give you and your lender a grace period of 30 days before your policy is canceled and you lose coverage. If that happens, you’ll have what is referred to as a lapse in coverage.

If you can’t afford insurance or you have a long claims history and can’t find a company that will insure you, you may be eligible to purchase a Fair Access to Insurance Requirements (FAIR) plan to avoid a coverage lapse. FAIR plans are policies that are offered to high-risk applicants who can’t find insurance anywhere else. These plans also cost significantly more than private plans, so this should truly be a last-resort option.

Since homeowners insurance is required by lenders, they’re typically listed as an additional insured party on your policy, so they’ll also receive a cancellation notice if you don’t pay your premiums. If you don’t act fast enough, your mortgage company may buy insurance for you. 

If your coverage is going to lapse soon or you don’t have enough coverage to cover at least the mortgage on the property, your lender will impose lender-placed insurance (also known as creditor-placed and forced-placed insurance) on the home. Similar to FAIR plans, lender-placed insurance is generally more expensive than the insurance you had before and should be avoided.