* Real Estate Articles and Q & A *

It is insurance that protects a homeowner against loss from fire and other hazards that may impair the value of their home.

Is homeowners insurance a settlement cost?

Yes, it appears on the Good Faith Estimate as an estimated amount, and the actual amount is shown on the HUD1, which is the closing document that lists all settlement costs.

It is not a mortgage cost, but lenders require that their "minimum insurance requirements" be met before they will fund a loan. The house is their collateral, and they don’t want to lose it to a fire or other catastrophe.

The insurance requirements vary from lender to lender but on a house purchase, most require that the premium be paid for the first year at closing. If the borrower is maintaining an escrow account, an additional amount equal to several months of premiums must be paid to fund the account.

Can I shop for homeowners insurance on my own?

You can and you should. Homeowners insurance is a lot easier to shop for than a mortgage because premiums change only occasionally, so the price you are quoted is very likely the price you will pay.

Shoppers should be aware that carriers today have access to databases that combine claims data from many companies. If you have been making numerous small claims, all the carriers you shop will likely be aware of it. It is still worth shopping, however, because the carriers use different risk evaluation systems.

In shopping for the lowest premium, you must be very careful to compare apples with apples. The principal factors you must hold constant in soliciting quotes from different carriers are the deductible and the coverage.

The deductible is the loss amount that is the homeowner’s responsibility, e.g., $1,000. Only losses above that amount are insured. Higher deductibles carry lower premiums.

The coverage dictates the maximum loss the policy will pay. There are four levels of coverage, called "actual cash value" (lowest coverage), replacement cost", "extended replacement cost", and "guaranteed replacement cost" (highest coverage, but not necessarily available). Higher coverage carries higher premiums.

Consumer Reports suggests carrying a high deductible. Do you agree?

Yes. I have the highest deductible my carrier offers, and if they offered a larger one, I would take it. If a large tree falls that I must have removed. Even if the cost exceeds my deductible, I don’t make a claim because it will raise my premium. The number of claims a homeowner makes figures importantly in premium setting.

Homeowners insurance should not be used as a way to budget expenditures for minor mishaps, such as falling trees. Even if small claims did not impact the premium, the carriers price deductibles so advantageously that it pays homeowners to self-insure.

If the typical homeowner took the largest deductible, banked the saving in premium, and used the account to pay for what would have been claims under a smaller deductible, the account would grow over time. The saving in premiums using the large deductible would more than cover the claims under the small deductible.

BUT NOTE: You should check with your mortgage lender. They may limit the size of the deductible.

The information provided is not and should not be considered legal advice. Nor do I promise or guarantee that the information contained on this post or any linked site is accurate, correct, complete, or current. You should seek the advice of competent counsel licensed to practice in your state to answer specific legal questions.