What Is Homeowners Insurance Premium at Closing?

Homeowners insurance premiums are a financial aspect for home buyers. This premium is the cost for a policy protecting a major investment. It safeguards the home and contents from covered risks, and provides liability coverage. Understanding this payment in a real estate transaction is important.

Understanding Homeowners Insurance Premiums

A homeowners insurance premium is the payment for a policy protecting a home and its contents. Coverage includes the dwelling, the physical structure and attached components like a garage or deck. It pays for rebuilding or repairing the home if damaged by covered perils such as fire, windstorms, hail, or vandalism.

The policy also covers personal property, including items like furniture, clothing, and electronics, against theft or fire. Personal property coverage is often 50% to 70% of dwelling coverage. Personal liability coverage protects the homeowner for bodily injury or property damage to others on their property.

Homeowners insurance includes coverage for additional living expenses (ALE). This pays for increased costs, like hotel bills or restaurant meals, if the home becomes uninhabitable due to a covered event. The premium is also influenced by the deductible, the out-of-pocket amount paid before coverage begins. A higher deductible results in a lower premium, while a lower deductible leads to a higher premium.

Factors That Influence Your Premium

Several elements influence homeowners insurance premiums. Location is a key factor, as rates vary based on proximity to fire hydrants, fire stations, local crime rates, and natural disaster risks. Homes in areas prone to frequent claims or higher crime rates incur higher premiums.

Home characteristics also influence premiums. Age, construction type (e.g., brick versus wood frame), roof condition, and safety features like alarm or sprinkler systems impact costs. Older homes may have higher premiums due to aging electrical or plumbing systems. Installing protective devices or upgrading an older roof can lead to discounts.

Coverage limits and deductibles affect the premium. Higher coverage amounts or lower deductibles result in a higher premium. Claims history also affects rates; multiple claims may lead to higher rates. In some states, credit score can influence the premium, with better credit leading to lower rates.

The Premium Payment at Closing

Lenders require homeowners insurance for mortgage loans. This protects the lender’s financial interest in the property, which serves as loan collateral. Without insurance, if the home were damaged, collateral value would decrease, risking the lender’s investment.

At closing, the borrower must prepay the first year’s homeowners insurance premium. This ensures coverage is in place upon ownership transfer. This prepaid premium, with other closing costs, will be detailed on the Closing Disclosure (CD), which itemizes all charges and credits.

Lenders establish an escrow account for future homeowners insurance payments. A portion of the annual premium is collected monthly through this account with the regular mortgage payment. The lender holds these funds and pays the insurer annually. This ensures continuous coverage, protecting both the homeowner and lender’s investment. Proof of the active insurance policy must be provided to the lender before closing.