January 30th, 2022 3:53 PM by Sam Kader MLO130505
Across the country homeowners renewing their policies are discovering that rising material costs, supply chain disruptions and climate change are combining to drive premiums to an average annual premium according to the insurance Information Institute a non-profit organization know as Triple-I that provides information on the insurance industry.
All mortgage lenders require borrowers to carry a homeowners insurance policy to protect the collateral on their investment. The average homeowners spends about 1.91% of their household income on home insurance. The cost of insuring a home depends on several factors. Location often drives costs up particularly if the house is in an area prone to natural disasters. Some areas have higher rates because it costs more to rebuild a house there.
Most homeowners want their home back in the condition it was before the event destroyed it which is why Replacement Costs Estimate (RCE - see example below) - the cost to rebuild the home as it was often differs from the value of the home. Replacement cost also doesn't take into account the value of the land. In some cases, the replacement cost of a house is less than the value of the house because the land value is high in that area. In general - we will need a RCE Report when Section A - Dwelling Coverage on subject property is less than the loan amount. .
For example - a homebuyer is applying for $500,000 loan amount . His insurance agent provided him with an insurance quote shown below - $305,000 Dwelling Coverage with 125% Extended Replacement Cost for a total Dwelling A coverage of $381,250 ($305,000 * 1.25%). Since the coverage amount of $381,250 is less than loan amount of $500,000 - a RCE is required.
When the pandemic hit, lumber prices spiked to about $1,500 per thousand feet of board in March 2021, a 400% increase year-over-year. The supply chain bottle-neck has also made refrigerators and stoves more expensive and scarce. Appliances were rated the items most in short supply followed by lumber. Climate change also is contributing to higher insurance rates with more severity and intense natural disasters. When a natural disaster affects a wide area, the demand for materials and labor puts pressure on prices.
Home insurance costs are rising faster in some states than others with Colorado experiencing a 21% increase in average annual premiums for homeowners insurance from 2017 to 2020. Fortunately for us here in Washington state - our property insurance premiums are among the lowest in the nation. Whether the increases are small or large there are ways to save money on homeowners insurance premiums - for example by increasing deductible, you can reduce annual premiums.
Here's more information on other insurances involve when buying a house.
Example of RCE Report