Homeowners insurance is generally a required part of homeownership with a mortgage lender, and its a good idea to have even if you own your home outright. When planning your household budget, you might want to know your options regarding monthly or yearly payments.
There a few things to consider when contemplating choosing monthly or yearly payments. First, you need to know how a plan you want to purchase handles payments, and if either option is available to you.
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Knowing When To Pay Your Premium
If you have a mortgage on your home, your lender is likely to have established an escrow account to handle all the payments that you need to make involving your home. Escrow accounts are a convenient way to have a third party manage the multiple payments that go into owning a house.
Each month, a portion of the amount that you will need to pay for the year will be due. On top of the mortgage payment that goes towards the loan on your house, you will also need to make payments that contribute toward your annual property tax and homeowners insurance premium.
This allows you to make a single payment to handle all three bills. When those property taxes and home insurance premiums are due, the bank controlling your escrow account on your behalf will make those payments for you.
If there are any changes to local, state and federal property taxes or your insurance premium, your bank will determine what your monthly escrow payment will be. Additionally, many banks will require you to keep a minimum balance deposited in your escrow account to cover additional, unexpected increases that need payment.
Often, mortgage lenders will make using an escrow account a requirement for you to receive the loan. In that case, no matter how the company that holds your home insurance policy bills, your only option is to pay monthly as part of your escrow payment.
Many lenders will allow you to forgo making escrow payments after you have built up a minimum of 20% equity in your home. If you choose to take that option, you will be responsible for making sure to make timely and proper payments on your home insurance, as well as for your property tax on your home.
Understanding What Goes into Your Homeowners Premium
Home insurance policies will provide coverage over both your house and your personal property in the event of damage or theft. Mortgage lenders will require you to have coverage to the amount that protects the entire purchase price or your home.
There are several different factors that go into determining the cost of your home insurance premium. As the policy will cover the cost of damage from specified natural disasters to both your home and most of the property within it as well as liability coverage, insurers spell out very detailed policies that delineate what is and isn’t protected.
The structure of your home, the value of both your home and personal property, and risk factors for both damage and liability all contribute to how much your homeowners premium will be. Risk factors can include:
- Your home’s neighborhood
- Your area’s crime rate
- Your home’s building material availability
Once you know what coverage policies offered in your area provide, you can also decide if you need additional coverage through riders and supplemental policies that will add on to your premium. Knowing the final amount will play a factor in whether or not monthly or yearly payments are right for you.
Comparing Monthly Versis Yearly Payments
If paying your homeowners insurance yourself is an option for you after either building up equity in your home or owning it outright, you need to compare the pros and cons of both monthly and yearly payments to decide what’s the right option for you.
Advantages of Yearly Payments
If you decide to pay your insurance premium in one payment per year, you can potentially get a lower insurance rate through your policyholder. Often, if your mortgage lender is having you pay into an escrow account, they are actually paying the single annual amount and referring those saving onto your monthly escrow payments.
This has the benefit of not having you have to give up a large amount of cash at once while still receiving the significant discount a yearly payment can bring. Additionally, since you would already be making your monthly mortgage payments anyways, you don’t have an extra bill to worry about by paying your insurance separately.
Advantages of Monthly Payments
Should you choose to pay your insurance premium monthly instead of yearly, you will be able to have more cash available to you in case something happens that requires you to need that option.
If you aren’t using an escrow account to pay your premium through a mortgage lender, you won’t have the option of getting the annual payments while keeping more cash in your bank account.
However, if that’s something you feel you need to do for better financial flexibility in the short-term, there are plenty of ways to reduce your homeowners insurance monthly payments.
Deciding How to Save Money on Your Homeowners Payments
When making the decision to pay monthly or yearly, make sure to keep in mind that you can also save on homeowners payments in the following ways:
- Bundle your home insurance with other insurance policies you have
- Improve your credit score with responsible borrowing and spending to get a lower premium
- Choose a plan with a larger deducible payment to reduce your premium
- Evaluate which plans offered in your area offer the best combination of coverage and cost to fit both your insurance needs and your budget