Every year, Americans pay about $3.50 for every $1,000 their home is valued at to home insurance. That said, the rates differ significantly across states and localities. Before buying a home, it’s important to have a rough idea of what your monthly expenditure will be.
That’s the only way you’ll formulate a workable financial plan to service your mortgage and run the house. Home insurance is one expense you can’t afford to ignore. Making a home insurance estimate is, however, easier said than done.
This article walks you through everything you need to know to estimate house insurance accurately. Read on:
How to Estimate Home Insurance
Buying a house beats renting. That’s not to say that owning a house is easy, wait until you read about the insurance expenses. That said, insurance policies protect your money: Here are other tips to protect your money as a new homeowner.
As you plan to buy that dream house, take time to make a home insurance estimate. You want to know how much it will cost you to keep your investment safe. Planning in advance prepares you for the premiums ahead, and that’s not even the best part: You get enough time to weigh the options available and pick the best plan for your specific situation.
So, how do you estimate house insurance? Well, all you have to do is put yourself in the insurer’s shoes. Think like your insurer.
To do that, you’ll have to acquaint yourself with a few terminologies:
Home Insurance Estimate: Replacement Cost
The replacement cost is the amount of money you’d need to rebuild your house in the case of complete damage. The replacement cost isn’t to be equated with the reselling price. Oh, if only things were that easy!
A house’s resell price is higher than the replacement cost. This is because the land the house rests on never needs replacement. On the other hand, resell takes the land’s value into account.
So, how do you determine your house’s replacement cost? You can get a reliable estimate from one of three sources:
- From an insuring agency
- From a building professional familiar with the relevant building costs.
- You can do it yourself if you are familiar with local building costs.
Let’s look at how the last option works:
House Insurance Estimate DIY: Estimating Replacement Cost
Start with publicly available data. For starters, the average cost of building in the US is about $150 per square foot. However, the cost to build varies significantly across different states.
I’ll illustrate, building a 1,800-square-foot will cost $145,912 in Oklahoma and $288,066 in Hawaii. Begin your home insurance estimate by finding out the average cost of building per square foot in your locality. Local contractors will prove very handy, post a question on their sites.
In Portland, the cost of building a square foot averages out at about $126.77. Your locality’s building costs shouldn’t differ a lot from that. Estimating building costs per square foot is excellent for two reasons:
- They are easily available.
- These estimates bundle all costs together. What do I mean? These averages take the cost of building materials, labor, and other relevant costs into account.
The next step is to determine the value of your house’s major components. I’m talking roofing, flooring, fixtures, and the like. Contact local suppliers and determine the cost of purchasing everything anew.
Sum the cost of building with the cost of the major components and you have a reasonable estimate of your house’s replacement cost.
Insurance Policy Limit
Home insurance estimates must take policy into account. This is because different policies are serviced by differently priced premiums. The policy limit is an important consideration when shopping for home insurance.
So, what is a policy limit? A policy limit is the maximum fraction of your house’s value the insurer is obligated to cover. The higher the limit, the more money your insurance coughs up.
The downside is that the higher the limit, the higher the premium. There are three types of policy limits:
Actual Cash Value (ACV)
Under this policy, the insurer pays the total cost to rebuild your house minus its depreciation. Let’s see how that works out with a hypothetical situation:
Suppose you built a home for $300,000 ten years ago. Imagine that in that time, the house has depreciated by 50%. If you took out an ACV policy on the house, the insurer will pay you $300,000 minus depreciation.
50% depreciation in our case amounts to $150,000. So, if the house should suffer damage after ten years, the insurer gives you $300,000 minus $150,000 which equates to $150,000.
Effectively, the insurer only pays you what a similarly aged house under a similar rate of depreciation is worth. The problem here is that not all 10-year-old houses are equal. That said, this is the cheapest policy on the list.
Replacement Cost Value (RCV)
Most people who buy a house when young rarely think beyond the cost of purchase. That’s a bad move. The decision to settle on a coverage policy must be well thought out.
With millennials, for example, estimating home insurance cost is not a top priority. A survey found that 8 out of 10 millennials are unfamiliar with the insurance industry. A very sad trend, especially since millennials account for 34% of all home purchases.
Let’s look at how different an RCV cover is from an ACV coverage. Under an RCV policy, the insurer pays the exact amount it would take to rebuild your house in the existing market environment. RCV coverage mitigates the effects of depreciation.
RCV coverage is more expensive than ACV coverage. If a localized event were to adjust the prices of building materials and labor upwards, you’d have to cater for the deficit out of your own pocket.
Extended Replacement Cost (ERC)
This is the most expensive policy out there. In the case of a disaster, the insurer pays everything you need to rebuild your home. Even in the case of a localized disaster, the insurer will pay a fraction higher than your replacement cost. This way, you never have to pay out of your pocket.
The choice of policy affects your premiums. Each choice has its benefits and shortcomings. Settle for the policy that best balances your unique needs.
Pro Tip: What you need your insurance to do determines the policy you take out. That’s to say that your unique insurance needs inadvertently influence your home insurance estimate. Read also common mistakes homebuyers make.
Home Insurance Estimate: Understanding Common Riders
Insurance riders are extra policies that cover what your standard policy won’t. They substantially add to monthly premiums making them crucial when estimating home insurance cost. There are two main considerations to make when choosing insurance riders:
The Excluded Risks
Consider the prevailing regional risks that may pose a danger to your house. Are there any risks that aren’t covered under your policy? If you deem the danger sufficient enough, best get a separate policy.
In Florida, insurance policies will generally include hurricanes and flooding in the list of hazards they cover. 80% of the costliest hurricanes in US history all impacted Florida so the decision is well thought out. In Portland, insurers aren’t likely to cover flooding even though some parts of the city may suffer floods after winter storms.
Recently, parts of Northeast Portland suffered serious floods after a water main broke. Imagine how good it would be to have an extra policy covering flooding in such a case.
The Valuables You Own
Costly items like pieces of art and jewelry usually require additional coverage. Home insurance policies cap the amount of coverage available for individual items. If your home insurance places a cap of $1,500 per item, weigh your options.
If you can comfortably sort out the deficit out of your pocket, there’s no need to add another policy. However, if you desire extra coverage on your valuables, take out an extra policy. It all boils down to what you think suits you best.
Buying that dream house need not be a dream. You don’t even have to wait until you are grey and old. That said, it’s not easy: You have to identify a good bargain, raise enough money for the purchase, and formulate a dependable home insurance estimate before becoming a homeowner.
You’ll need help every step of the way. That’s where we come in. The house prices in Portland are among the fastest growing in the country.
With the increased interest in Portland real estate, today is the best time to buy. You don’t want to wait until all the good bargains are gone. That said, you need money to make your homeowner dreams come true.
You may not necessarily have that cash on you, but that shouldn’t come between you and your dream. We offer flexible lending options that’ll land you that dream house without undue pressure on your financial situation.
Contact us, let’s make those dreams come true.
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