I’m a homeowner myself, and my rates increase just like everyone else. The difference seems to be that I know how and why the premium changes. The issues arise when we don’t understand. That’s a call I get often – I’ve made no claims, why did my rates go up? OR Why are all homeowners insurance quotes extremely high? Well, there are 4 key factors that determine home insurance rates.
My best guess would be that insurance companies place the same amount of significance on each of these factors.
…in no particular order:
1) Size of your house and the cost to replace it: insurance companies offering a replacement cost policy don’t care what you paid for the home. Replacement cost is not purchase cost.
A good rough estimate would be $100/sq ft. Sometimes more depending on the modernization of the home.
Just because you’re buying a home for $150,000 doesn’t mean you can insure for that amount. Take the square footage multiplied by 100. 1900 sq/ft would be insured for roughly $190,000.
The amount you’re borrowing matters as well (for those not paying cash). Your mortgage company won’t allow you to insure your property for less than the loan value. One of my main questions to potential customers is “what’s your loan amount?”. That gives us a floor for the coverage. We know we can’t go below that number.
TIP: when buying and/or insuring a home; sq/ft X $100
2) Location of the house: the distance between your house and the fire department is vital. However, it gets a little deeper – is it a volunteer fire department or a full time station? The Arkansas Department of Insurance has Protection Classes (PC). The class is determined by the grade of the fire department, set by the ISO (Insurance Services Office).
A PC1 is the best class to be in. It’s the least expensive for this key factor. 10 is the complete other side of the spectrum, being very expensive and difficult to find an insurer.
Your PC is can be found when obtaining a home insurance quote.
Insurance companies like to see a fire station within 5 miles of your house, and a fire hydrant within 1,000 ft. We fall in a PC10 when we’re further than both those distances.
TIP: check those distances and determine your PC before making an offer on a home. You can do this by getting a homeowners quote.
3) Claim history: this one is a no-brainer, except for nature claims, which aren’t held against us. However, they do prevent us from receiving a claim-free discount. Any claim that’s not directly caused by nature will be factored into our premium calculation.
Periodically, claims on the property we’re buying show up on our report. This is nothing to worry about. The claim comes with an address that clearly shows it doesn’t belong to us.
Homeowners insurance quotes will also show if damage has occurred on the home. I can think of a customer who learned the home he was interested in had a previous attic fire. It showed up on the claim history (aka CLUE Report) when he received his quote.
You can sometimes tell when the roof was replaced, or when it was supposed to be replaced but wasn’t. We’ve seen that before as well.
TIP: your claims will follow you for at least 3 years – non-nature claims aren’t much to worry about. Get a quote on the home your interested, and ask the agent to provide you with any claim history that is revealed.
4) How your credit looks: insurance companies have run reports that show individuals with lower credit scores tend to make more home insurance claims. Therefore, the better your credit, the lower your premium.
An insurance company cannot legally hit your credit (hard hit). They can, however, run a soft hit. The soft hit is a skim across the top. It will not lower your credit rating like when applying for a credit card or loan. My guess is they’re only getting one of the 3 scores that interest them.
The 3 credit scores come from Equifax, Transunion, and Experian. Most companies are only looking at one. Though I have no idea which company looks at which one. I do know those scores can vary. My lowest score may be 50 points below my highest, maybe more.
TIP: remember that credit is not the sole key factor when determining how much is homeowners insurance. Also, shop around, in hopes of finding a good company who is interested in your highest score.
It’s important to what affects homeowners insurance rates when you’re ready to purchase your next home, or if you’re a first time home buyer.