Insurance costs that can bust your home buying budget

1
Marko Geber/Getty Images
Bankrate Logo

Why you can trust Bankrate

While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for . This content is powered by HomeInsurance.com (NPN: 8781838). For more information, please see our

If you have given thought to purchasing a home recently, you are likely aware of the shortage of housing inventory and the increased possibility of bidding wars once you submit an offer. Inventory and asking prices are at levels not seen in years in this country. In our new post-quarantine world, many choose to settle in suburban or rural areas rather than cities because of the lower cost of land. People are moving to some surprising locations, with Utah, Montana and Nebraska topping the list for hot housing markets. Location changes can come with unexpected increases in insurance costs that are crucial to research before you close.

Many homebuyers understand that a competitive market leaves less time to decide which home to purchase. On top of bidding wars, increased market costs and interest rate fluctuations, buyers need to be prepared to potentially stretch their budget to get the home they want. Yet, few have probably considered the cost of insurance — both homeowners and auto — and the impact these costs have on overall annual expenses.

While homeowners insurance may seem like an obvious cost when buying a home, it’s something people do not give much thought to, even when moving to a different state. Many factors can drive up premiums, especially in an area that’s prone to risks such as flooding or tornadoes. Auto insurance is even more unlikely to cross the minds of homebuyers when they have so many other things to think about, but it, too, has the potential to drastically impact your household budget.

“The housing markets that are currently ‘hot’ are a bit different from what we’ve seen in the past, so a lot of homebuyers may be shocked when they move to, say, Montana, and discover that both home and auto insurance are higher than the national average,” says Greg McBride, CFA, senior vice president and chief financial analyst for Bankrate.com. “You kind of expect everything to cost more in New York or California, but now that more people are moving to less densely populated states, it’s really important for them to be financially prepared for other big-ticket costs like insurance before they get stuck in a bidding war for the house they want.”

Why people are moving

People always move for various reasons, but 2020 brought new reasons for moving and saw people choosing areas that were not previously as popular. While more workers are free to work from home and live anywhere these days, other moving trends are emerging:

  • Cities with the lowest COVID-19 cases are seeing the most growth for new home sales in 2021, as more people are comfortable viewing homes in person.
  • Historically low interest rates are projected to continue throughout 2021, fluctuating in the low 3% level, which means buyers want to take advantage and purchase sooner rather than later.
  • People are ready to choose new, post-quarantine residences, in numerous cases settling down to be closer to friends and family, and the trend is towards suburban and rural areas because land is cheaper than near cities.

Whether you are moving to a hot housing market or moving to the suburbs to be closer to family, it’s a good idea to look at insurance and other costs before you finalize your budget.

How insurance costs can bust your budget

In any seller’s market, bidding wars are not unusual. If you pay over the asking price, you would obviously need more money to pay for the home itself. Another side effect of low home inventory is that it may push you to purchase in an area you might not have considered, such as a risk-prone area susceptible to flooding or perhaps one with high construction costs to rebuild. No matter the reason, these scenarios can lead to increased insurance costs. While insurance rates are based on many factors, what you pay for homeowners and auto insurance could be the tipping point in your budget, especially if you are already stretched thin due to housing prices.

Homeowners insurance

While homeowners insurance may not be the focal point of your home buying experience, it is a critical aspect of the overall process. Taking time to research and compare options gives you greater control over cost and coverage for your new place. Mortgage lenders require homebuyers to lock in their homeowners insurance policy before closing, which means a policy is an integral piece of the homebuying puzzle.

A comprehensive homeowners policy offers several critical protections, including:

  • Pays to repair or rebuild your home if you experience a fire, hail or storm damage, or similar events.
  • Covers the cost of your belongings, except some high-value items.
  • Offers medical payments if someone gets hurt while visiting your property or if you cause damage to another person’s property.

The average cost of a homeowners policy is $1,312 annually, but what you pay will depend on many factors, and it’s not always obvious when you are checking out listings in the area where you want to move. The average cost of a home in Nebraska is just under $200,000, for instance, yet the average cost of home insurance in the state is more than double the national average. It’s important to keep in mind that multiple factors influence the price of a homeowners policy, including the cost to rebuild your home in the event it is destroyed, an increase in population, a change in crime statistics or several other reasons.

Ways to save on homeowners insurance

The good news within this sea of bidding wars and higher housing costs is there are ways to save on your homeowners insurance, including:

  • Comparison shop: One of the best ways to save is to compare multiple providers. It ensures you are paying the least expensive rate for your circumstances, and it forces you to compare coverage options.
  • Bundle your policies: Purchasing your homeowners insurance policy from the same carrier as your auto insurance policy is one of the primary ways to save on premiums.
  • Review all discounts: From installing security systems to making your home more disaster-resistant, review the numerous discounts available with a licensed insurance agent to further save on premiums.

Additional coverage for homes in risk-prone areas

Keep in mind that you may need to purchase additional coverage that is not a standard part of a policy, depending on where you are purchasing a home. This could include:

  • Flood insurance: Flood insurance coverage may be required in flood-prone areas, and you may want to consider it even if you are not required to have it. Flood is typically excluded from homeowners insurance policies. A licensed real estate agent can help determine if it is necessary and how much you need.
  • Earthquake: Earthquake coverage is not standard in a policy, so you may want to look into purchasing this insurance if you live in an earthquake-prone area.
  • Wildfire: Over 500,000 homes are in wildfire-prone areas, making wildfire coverage a must for some homeowners.

Auto insurance and vehicle costs

In the excitement and pressure of purchasing a new home, another overlooked potential budget-buster is the cost of auto insurance. Like homeowners insurance, your auto insurance rates are calculated on many factors, including your ZIPcode. Rates in your ZIPcode fluctuate based on the population, where you park your car, vandalism and theft statistics. The average cost of car insurance in the U.S. for 2021 is $565 for minimum coverage and $1,674 for full coverage. If you are planning to move to Louisiana, though, be prepared to pay a lot more — the average cost of full coverage car insurance is $2,724, which is 63% higher than the national average. Florida, New York, Michigan and Nevada round out the country’s highest average rates.

The area you live in and its risk factor for accidents, along with increased annual mileage, also determine the amount you pay in vehicle registration and vehicle tax, all of which could increase the true cost of your auto insurance.

Other costs to consider

Before you take the plunge into buying a new home, you may want to keep some other costs in mind before you get to the closing table. These costs could also wreak havoc on your budget if you do not plan accordingly.

  • Property tax: This is the tax assessed by the local and state governments for your property.
  • HOA fees: Homeownership Association (HOA) fees are dues required for maintaining some residential properties. The necessary amount and frequency vary by neighborhood.
  • Closing costs: Closing costs are a fee charged by the lender at closing and are typically 2% to 4% of the purchase price.
  • Cost of living: Expenses such as fuel, food and everyday expenses may be more (or less) depending on the cost of living in your new neighborhood.
  • Private mortgage insurance (PMI): PMI is an extra monthly charge you pay your lender if you cannot put at least 20% down with your home purchase.
  • Remodeling or redecorating: If you purchase a fixer-upper or need to furnish your new abode, be sure to set a realistic budget for your decorating expenses.
  • Landscaping: Average annual prices can land anywhere from $3,000 to $20,000, depending on your location and landscape dreams.

While increased costs in a seller’s market are to be expected, the best prevention for a busted budget is to research and prepare for as many costs as possible in the area where you wish to move. Finding out about unanticipated higher costs in a new area will give you time to shop around and consider other alternatives if you find you simply cannot afford to live there.

Methodology

Bankrate utilizes Quadrant Information Services to analyze 2021 rates for all ZIP codes and carriers in all 50 states and Washington, D.C. Quoted rates are based on 40-year-old male and female homeowners with a clean claim history, good credit and the following coverage limits:

Auto:

  • Bodily injury liability per person: $100,000 bodily injury liability per person
  • $300,000 bodily injury liability per accident
  • $50,000 property damage liability per accident
  • $100,000 uninsured motorist bodily injury per person
  • $300,000 uninsured motorist bodily injury per accident
  • $500 collision deductible
  • $500 comprehensive deductible

To determine minimum coverage limits, Bankrate used minimum coverages that meet each state’s requirements. Our sample drivers own a 2019 Toyota Camry, commute five days a week and drive 12,000 miles annually.

Homeowners:

  • Coverage A, Dwelling: $250,000
  • Coverage B, Other Structures: $25,000
  • Coverage C, Personal Property: $125,000
  • Coverage D, Loss of Use: $50,000
  • Coverage E, Liability: $300,000
  • Coverage F, Medical Payments: $1,000

The homeowners also have a $1,000 deductible and separate wind and hail deductible (if required).

These are sample rates and should be used for comparative purposes only. Your quotes will differ.

Written by
Sara Coleman
Insurance Contributor
Sara Coleman has three years of experience in writing for insurance domains such as Bankrate, The Simple Dollar, Reviews.com, Coverage.com and numerous other personal finance sites. She writes about insurance products such as auto, homeowners, renters and disability.