If you have a mortgage, you likely pay a portion of your homeowners insurance premium each month when your mortgage payment comes due.
While many consumers are currently dealing with higher insurance costs due to inflation, it's likely that homeowners in certain areas will continue to see their premiums climb as severe weather linked to climate change becomes a larger threat.
This will have a big impact on the average mortgage payment.
Climate change and insurance: How your mortgage payment could be affected
Mortgage payments are made up of four parts: your mortgage principal, interest, taxes, and insurance. This is often referred to as PITI.
The insurance part of your payment includes your annual homeowners insurance premium divided by 12. You'll pay part of your premium each month when you make your mortgage payment, and then your mortgage lender will pay the full premium on your behalf.
Your homeowners insurance premium can change when your policy is renewed each year. As the effects of climate change become more pronounced, homeowners may notice their insurance premiums increasing significantly, costing them more and more each month when their mortgage comes due.
In some of the most disaster-prone areas of the US, like Florida and California, consumers have already seen their insurance costs go up and their choice of insurers become more limited as some companies pull back on the coverage they offer in high-risk areas.
"Climate change is poised to significantly change the real estate landscape, particularly in California and Florida," says Todd Greenbaum, president and CEO of Input 1, an insurance software company based in California. "In California, wildfires' increasing frequency and intensity may result in higher insurance costs and increased expenses for retrofitting or rebuilding homes to meet new regulations. Similarly, Florida's escalating hurricane risks will likely lead to rising insurance premiums and potential property depreciation."
How to keep your homeowners insurance costs down
Whether your homeowners insurance premiums are rising in response to inflation or climate change, there are ways to save money and keep your mortgage payment from spiking each year.
Know your coverage needs
When you go to purchase coverage, it's important to understand how much homeowners insurance you actually need. If you have a mortgage, your lender will likely require that you at least have enough insurance to cover the cost of rebuilding your home.
"Rebuild cost does not equal market value of the home and property," says Heidi Moore, an insurance broker at Country Financial. "Just because your property will sell for $1 million doesn't mean we should insure for that. We want to look at the true cost of rebuilding your homes and get an accurate estimate."
Your insurance agent can help you determine your home's rebuild cost. You'll also need to determine how much personal property, liability, and additional living expenses coverage to purchase.
While you want to be sufficiently covered, you don't want to purchase more coverage than you actually need. When it comes to choosing personal property coverage, for example, make a list of all your belongings and their estimated values to figure out how much coverage you should get.
Get quotes from multiple insurers to be sure you're getting the best deal. Colleen Finn, managing director of product at Plymouth Rock Home Assurance Corporation, says that insurance shoppers should make sure any companies they're considering have a strong financial track record.
"Make sure any carrier has at least an A- grade from AM Best, the leading rating agency that evaluates the financial health of insurance carriers," Finn says.
She also says homeowners should look for insurers that have been in business for a while and have good online reviews.
Look into bundling your homeowners and auto insurance
You may be able to get a better deal by getting your homeowners and auto insurance from the same company. However, this isn't always the case, and you should compare bundling your coverage to getting separate policies from different companies.
You can also save by looking for discounts on other insurance policies you have, lowering your overall costs.
"Many customers have reduced the cost of their auto premium by switching to a usage-based insurance program, where auto insurance rates are determined by how you drive, often measuring frequency, distance, and/or other driving habits like speed, braking, and other safety related behavior," says Breanne Armstrong, director of insurance intelligence at J.D. Power.
Work with a knowledgeable local agent
An insurance agent with local know-how can be an invaluable asset when you're looking to save money.
"Not only can they give you information on how the area is looking for premiums but they can also help direct you to areas that may be less expensive," says Moore.
According to Moore, things like wildfire risk, crime rate, zip code, or being more than five miles away from the nearest fire station can all impact how much you'll pay for homeowners insurance.
"Often when you get past that five mile mark your premiums will almost double. Talking and working with a local agent will help you with some of these scenarios," she says.
Get a higher deductible
An insurance deductible is how much you'll need to pay out of pocket toward a loss before your insurance kicks in. A lower deductible means you'll pay less of your own money when you need to make a claim, but you'll pay a larger premium each year as a result.
Raising your deductible can help you lower your annual homeowners insurance costs. In fact, raising your deductible from $500 to $1,000 could cut your premium by as much as 25%, according to the Insurance Information Institute.
Just be sure you have the funds to afford the deductible you choose.
"Most homeowners will never experience a loss and in the event that they do, chances are the difference between a $500 and $2,500 deductible won't seem significant for the homeowner at the time," Finn says.
Storm-proof your home
Making your home more resistant to the elements can both lower your insurance costs and reduce the likelihood that you'll have to make a claim in the first place.
Think about adding storm shutters or impact windows, replacing an old roof with stronger materials or having hurricane straps installed, or getting a reinforced garage door.
Look for ways to get discounts
Make sure you're taking advantage of any discounts you qualify for. This could include discounts for having security systems installed in your home, going paperless and receiving all your documents electronically, utilizing certain smart home devices, or being a retiree.
"Some common devices that can help with costs include anti-theft and security systems, smart smoke detectors, and flood/smart water detectors," Armstrong says.
Improve your credit
Your credit history can also have an impact on how much you pay for insurance. To boost your credit score, make sure you're making on-time payments on any debt you owe and keeping the balances on your credit cards as low as possible.
Don't make unnecessary claims
Though it might seem unfair, filing a claim with your insurance can end up costing you in the long run. Some insurers provide discounts to customers who go a certain amount of time without making a claim, while filing a claim can actually cause your premium to go up.
Moore says that home insurance claims should be reserved for catastrophic losses. If a window breaks or something is stolen and you can cover it yourself, it might be better to pay out of pocket than alert your insurance provider and risk a higher premium.
Re-evaluate every year
Don't just let your policy auto-renew each year without taking a look to make sure your coverage still suits your needs.
"Review your policy each year to remove any coverages that may no longer apply to your particular situation," Finn says.
You don't want to get rid of coverage you need, but you might need to account for insured valuables that have depreciated in value, for example. Or, maybe you made improvements to your home that could earn you a discount.
Consider the risk of where you're buying
If you're shopping for a new home, you should consider both the short-term and long-term risks of the area where you're planning to live. Consider the typical weather the area experiences. Does it get a lot of severe storms or hurricanes? Is the area in a flood zone?
The higher risk the area, the more you'll probably pay for insurance. Depending on how long you plan to stay in the home, you may also want to consider how likely it is that the house will end up underwater one day, if you're in a coastal area. For example, researchers at the University of Miami predict that the city of Miami will be 60% underwater by 2060 — just 37 years from now.
This article originally published on Business Insider on October 3, 2023.