Homeowners Insurance premium at Closing | What to Know

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Homeowners insurance covers your home and belongings in the event of damage or loss due to unexpected emergencies, such as a fire, theft, or storms. The premium is the amount the insurance company charges you for this coverage.

In most cases, you purchase a policy when you buy a home, and then pay the annual premium (or some portion of it) at closing.

You’ll start shopping for insurance well before closing on your home purchase. Once you’ve selected your insurer and confirmed the coverages you want, you’ll provide the insurer’s information to your mortgage lender and to the title company or closing agent. Unless you’ve paid your premium out-of-pocket prior to closing, you’ll see it listed on your settlement sheet as an item required by the lender to be paid in advance.

In this post:

Is homeowners insurance required to buy a home?

Whether or not you’re required to have homeowners insurance depends on how you’re purchasing your home.

Insurance is required if you finance your purchase with a mortgage loan. Your home secures the mortgage loan — it serves as collateral that the lender can repossess if you were to default on the loan. The lender therefore needs to make sure you’ll be able to repair or rebuild the home if it’s damaged before you’ve paid off your mortgage.

You’re not required to buy home insurance when you pay cash for a home. However, you should strongly consider it. In 2020, the most recent year for which the Insurance Information Institute (III) has claims data, homeowners’ losses averaged $13,962 — money you’d have to pay out of pocket if your home was uninsured. What’s more, your total outlay could be much more, if your home was destroyed in a fire, for instance.

Types of homeowners insurance

The different types of homeowners policies are referred to as “forms.” The most popular is “special form,” or HO-3. Unlike more limited types that only cover certain emergencies, called “perils,” HO-3 provides “open-peril” coverage for your home’s structure.

That means all perils are covered unless the policy specifically excludes them. Floods and earthquakes are common exclusions. HO-3 coverage is more limited in its coverage of your personal belongings. In this case, it covers named perils only.

Condos and manufactured homes have their own special forms, as do older homes built using materials, or according to standards, that have since become obsolete.

Types of coverage

Homeowners insurance provides homeowners with several types of coverage, and in varying amounts.

  • Dwelling: Covers the cost of repairing or rebuilding your home if the structure is damaged by a covered peril.
  • Personal property: Covers the cost of repairing or replacing personal belongings stored in your house, on your property, or offsite. Coverage is limited to 50% to 70% of the amount for which you insure your dwelling, according to the III. Coverage for valuable items such as jewelry is subject to additional limits.
  • Liability: Covers legal expenses if someone sues you because they were hurt on your property or because you, your pet, or a member of your household injured another individual or damaged their property.
  • Additional living expenses: Covers basic expenses such as shelter and food, if your home is damaged so severely that you must live elsewhere while it’s being repaired.

What is the average cost of a homeowner insurance premium?

Premiums vary widely by state, the amount for which you’re insured, and other factors.

Nationally the average premium for an HO-3 policy is $1,311, according to the latest available data from the National Association of Insurance Commissioners. However, the state average for Idaho is just $810, whereas the state average for Florida is $2,165.

Nationwide, you’ll pay $322, on average, for $50,000 worth of coverage, $952 for $200,000 to $299,999 worth of coverage, and $2,181 for coverage worth $500,000 or more.

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How to pay your homeowners insurance premium

How you’ll pay your homeowners insurance premium depends on your mortgage lender’s requirements and the type of loan you have.

Many homebuyers use a “PITI” mortgage loan that combines the mortgage principal, interest, property tax, and insurance all in one payment. With a PITI mortgage, you’ll pay a portion of your premium into an escrow account at closing. The lender will then collect one month’s worth of your annual premium with each mortgage payment and escrow the funds until the premium is due, at which time the lender will pay it.

Even without a PITI mortgage, an insurance escrow of some or all of your first-year’s premium is usually required if you put less than 20 percent down on your home purchase. It’s always required for homes financed with an FHA loan.

The benefit of escrowing payments is that you don’t have to worry about coming up short when your premium is due. The escrow also relieves you from having to remember to make the payments because the lender does so on your behalf.

If you’re not required to escrow payments and you opt not to, you’ll likely have to pay your full-year’s insurance premium at closing. After that, you can pay using any method your homeowners insurance company accepts, such as:

  • One-time online payment
  • Online payments via automatic debits from your bank account
  • Automated phone payments
  • Bill-pay service from your bank or other financial institution
  • Check or money order by mail

Paying on your own might appeal to you if you want to keep closer tabs on your insurance and want full control over the payments.

Tip: Choose the method that makes sense for you. Paying in full can often score you a discount, but monthly automated payments may fit your budget better.

Factors that affect your premium

Insurance companies set premiums according to risk. Any factor that affects your likelihood of filing a claim and the amount the insurer might have to pay affects your premium.

  • Location: Crime rates, vulnerability to damage from natural disasters, and distance from emergency services all influence the amount you’ll pay for coverage.
  • Coverage: The type of policy you have — HO-3 vs. a more limited form, for instance — and optional coverages you purchase also affect your premium.
  • Price of the home: Assuming your home’s price is consistent with the costs to rebuild it, this is the most important factor in determining your insurance rate.
  • Credit history: Credit history is an important component of your insurance score, which predicts how likely you are to file an insurance claim.

Frequently Asked Questions

  • What does it mean to pay a mortgage premium at closing?

Unless you’ve prepaid your homeowners insurance prior to closing, you’ll pay it along with your other closing costs. In that case, you’ll see it listed on your settlement sheet.

  • Why do I pay homeowners insurance in advance?

Mortgage lenders require advance payments to ensure that the insurance is paid on time. This is one way lenders protect their investment in the homes they finance.

  • Why is homeowners insurance in escrow?

Escrowing homeowners insurance ensures that there are sufficient funds to pay the premium when it comes due. Escrowed premiums you pay at closing can also offset future increases in the premium.

  • Is my premium tax deductible?

No, you can’t deduct your homeowners insurance premium from your taxes if the home is your primary residence. Speak with your tax advisor to learn about situations where deducting your insurance premium may be allowed.

  • What is the difference between an insurance premium and a monthly payment?

A premium is the price of insurance for the period the policy is in effect. Assuming a one-year period, each monthly payment you make covers 1/12 of the premium.

Disclaimer: All insurance-related services are offered through Young Alfred.

About the author

Daria Uhlig

Daria Uhlig is a contributor to Credible who covers mortgage and real estate. Her work has appeared in publications like The Motley Fool, USA Today, MSN Money, CNBC, and Yahoo! Finance.

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