Homeowners insurance (also called hazard insurance).
If you’re going to own a home, you have to have it. Well, I take that back – if you own your home outright, you don’t HAVE to have homeowners insurance … but if you ever experience a catastrophic event (i.e. a fire, flood, earthquake, a derecho) and you don’t have homeowners insurance, than you’re out of luck. If you have a mortgage on your home, however, you’ll have to have homeowners insurance … the lender will require it.
Your mortgage payment is made up of four components: Principal, Interest, Taxes, and Insurance … PITI. Some homeowners will choose to pay their taxes and insurance separately, but for the purpose of this post, let’s assume that every month you make your payment, some is going to Principal, some is going to Interest, some is going to Taxes, and some is going to Insurance.
Principal and Interest are easy to determine – these are based on the amount of money you’re borrowing, the interest rate, and the years of the loan (15 or 30 years, for example). Taxes are also easy to determine … by using the tax rates found throughout the New River Valley and multiplying the assessed value of the house by that rate, you can easily find the taxes. But how do you figure out the cost of hazard insurance?
My friend Eric Johnsen, at State Farm in Christiansburg, once mentioned that if I multiplied the value of the house by .0025 I could get a reasonable approximation of what the annual insurance cost for a particular home would be. It assumes a couple of things, of course – (1) that the insured value of the home is the same as the sale price of the home, as well as (2) a deductible of $1000. But it works really well – on the home I was living in at the time, for instance, it ended up being within $23 of the actual yearly cost of the policy.
Eric looked a little deeper, and found that over the policies he looked at, .002516 was the best average. So, the next time you’re looking at New River Valley homes and wondering just how much the mortgage payment on that beautiful home would be, you’ll have all the information you need to estimate your payments – including insurance.
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