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If you pay your homeowners insurance expenses as part of your monthly mortgage payment, an increased premium rate can raise your monthly mortgage payment amount and have a major impact on your finances. But with careful planning, you may be able to reduce your homeowners insurance rate and lessen the effect on your monthly budget.
How Do Increased Home Insurance Rates Impact Mortgage Payments?
Your monthly mortgage payment often includes homeowners insurance expenses and taxes, along with your principal and interest. Known as PITI, this is sometimes required by your lender or loan servicer. They hold those expenses in an escrow account to pay bills on your behalf at a later date. Even when not required, you may choose this option to make managing your housing expenses easier.
Homeowners insurance rates may change from year to year, which can cause your mortgage payment to rise or fall. To account for these fluctuations, your servicer conducts an annual escrow review to determine if there's too much money in the account to cover costs for the coming year (an overage) or too little (a shortage).
If you have an overage, you may get a refund from your lender. But when there's a shortage, you'll have to make up the difference by making an upfront payment or spreading out the additional over upcoming mortgage payments.
What to Do if Your Homeowners Insurance Increases
If your homeowners insurance rates go up, there are steps you can take to minimize homeowners insurance costs while still getting the coverage you need.
- Shop around. Even if you're happy with your current policy, comparing prices for the same type and amount of homeowners insurance from other providers may help you save. Check with your mortgage company to understand how much coverage you need and compare rates from different insurance companies online or with an agent. If you plan to change insurance companies, you may need to let your lender know before buying a new policy to get the paperwork in order for billing and payments to the new insurance company. You may also need to provide proof of cancellation of the old policy once your new coverage kicks in.
- Bundle home and auto insurance. Whether you stay with your existing insurance company or want to shop around, you may be able to save by "bundling," or buying multiple types of insurance from the same insurance company.
- Look for special discounts. Ask your agent about extra ways you may be able to save. Homeowners insurance discounts vary by company, but you may see savings for being claim-free for a certain number of years, working for a certain employer or being retired, or belonging to an alumni organization or professional organization.
- Increase your deductible. If raising your deductible is in your budget, it could help lower your homeowners insurance premiums. But, it's important to make sure you can still cover extra costs if you have a loss since your claim payout will be reduced.
Ask for an Escrow Review
Keep in mind that after lowering your home insurance rates, your mortgage payment amount won't automatically get updated to reflect the new costs. You'll need to get in touch with your loan servicer to request an escrow review. Or you can wait for your annual escrow review for any changes to take place.
How to Avoid Homeowners Insurance Rate Hikes
Homeowners insurance premiums cost an average of $1,411 per year nationwide, according to the National Association of Insurance Commissioners. Rates vary widely based on many factors, such as the type and amount of coverage, construction costs in your area, your home's age and history of past insurance claims.
As a homeowner, one of the best ways to prevent a spike in your premium is to file claims sparingly. Look for ways to make your home safer that may help prevent you from needing to file a claim in the first place or save on costs, such as installing a security system.
Remember, homeowners insurance should only be used when there is a major loss. Before filing a claim that could cause your rate to go up, consider your deductible and whether you can afford to cover the cost of a repair out of pocket.
Evaluating your level of coverage can also help you save. It's a good idea to periodically check your policy against current market rates to see how it stacks up. If you find that you're overpaying or have maxed out all the discounts available, it may be time to shop around for a new plan.
The Bottom Line
Paying your homeowners insurance premium as part of your monthly mortgage can help you spread out payments over time. But your mortgage payment can go up if your insurance rates increase. You may be able to find new ways to save with your existing insurance provider or shop for a new plan that offers better rates for the same coverage.
To keep your insurance premiums lower for the long term, improving your credit score may be able to help, especially in states where credit-based insurance scores play a role in calculating your premium.
Monitoring your credit with a service like Experian's free credit monitoring offers access to your FICO® Score☉ based on Experian data as well as your Experian credit report. You'll be able to track progress and get real-time alerts when any changes are made to your credit report, which can help you address potential issues and potentially avoid significant damage to your score.