Table of Contents
- 1 Homeowners insurance after mortgage payoff is not required
- 2 Here’s why you should still keep your house insurance even after you own your home
- 3 Is house insurance cheaper without a mortgage?
- 4 Is homeowners insurance tax deductible?
- 5 Summary: Keep homeowners insurance, but try to lower your premiums
It’s been a long time coming, but the end of your mortgage payments are finally in sight. Congratulations! This is a financial milestone that many people dream of and work towards, for years.
After basking in the feeling of being mortgage free, you might be asking yourself, do I need homeowners insurance if my home is paid off?
You won’t have any obligation to have homeowner’s insurance to satisfy your mortgage requirements. But you must continue having homeowner’s insurance to protect your home and valuables. Or else you risk losing your hard-earned money if your property gets destroyed or stolen!
If insurance premiums are a perennial pain in your behind, then there are many ways that you can lower your insurance premiums.
In this article we’ll explain why you’re better off keeping your homeowner’s insurance, and how you can save big time on your premiums. With lower premiums, you’ll soon be in mortgage-free bliss like you’ve always dreamed of! Let’s dive in.
Homeowners insurance after mortgage payoff is not required
When you bought your house, you might remember having to buy homeowners insurance in order to get your mortgage.
Mortgage lenders usually require that you get enough coverage to cover the amount that you owe on the house. This is so they can protect themselves. This example will explain it best:
Imagine that your home is worth $450,000. You have a down payment of $100,000 and the remaining $350,000 is a mortgage.
Now imagine that a fire completely destroys your home. There’s nothing left to salvage and your home value is effectively zero. Lenders know that owners might be tempted to walk away and not pay for the mortgage anymore. Why would anyone want to continue paying off more than $350,000 for something they can’t stay in anymore?
That’s why your lender will probably require that you get at least $350,000 worth of home insurance so that they can be sure that an insurance company will continue to pay off the mortgage.
After you pay off your mortgage though, lenders won’t need you to protect their investment anymore. After all, you fully own the house now.
So technically, you don’t have to keep your homeowners insurance after your mortgage is paid off. The question is, should you still give it up even though you’re not required to have it?
Here’s why you should still keep your house insurance even after you own your home
Having homeowners insurance is still a good idea, because you want some sort of protection on the value of your home. After all you worked so hard to pay off your mortgage, and you now have 100% equity in your home.
Let’s take the earlier example again.
You’ve now paid off the entire mortgage and own your home. That’s $450,000 worth of equity. Which is about two thirds of the average American household’s net worth. Would you be willing to risk losing that much of your net worth?
That’s why we’d advise that you continue to keep your homeowner’s insurance.
But what if you want to pay less on your homeowners insurance? You might be near retirement and looking to cut your expenses. How do you go about reducing your rate?
Is house insurance cheaper without a mortgage?
The National Association of Insurance Companies reports that the average cost of homeowners insurance is $1,211 a year in the United States.
That might seem a bit much. So how do you go about reducing your premiums?
Method 1: Reduce your coverage
If you’re willing to cover just part of your home’s value, then you’ll certainly pay lower premiums. There’s no coverage requirement anymore as we discussed earlier. So you’re free to choose how much you want to cover.
In the event that something happens, the insurance company will only pay up to what you’re covered for. So it really depends on how much risk you’re willing to take.
Method 2: Increase your deductibles
Most insurance policies have deductibles, which is how much you’re required to pay on a claim before your insurance benefits get paid out. If you’re willing to take on a higher deductible, then your premiums will be lower.
Again, this is because the insurer has to pay less in the event of a claim.
Method 3: Get the value of your possessions reappraised
When you first got your policy, you probably had the value of your property (including things like furniture and fittings) appraised. The value of those things may have been higher many years ago then they are now.
Get your possessions valued again, and you might find that you’re paying too much to cover items that have dropped in value.
Method 4: Disaster proof your house and increase its security
If an insurance company feels that you’re more likely to make a claim, then they’ll certainly make you pay a higher premium. Houses that are “high risk”, such as homes that are situated in disaster prone areas or areas with higher crime rates, attract higher insurance premiums.
So you can lower the risk of you making a claim by disaster proofing your home. For example, in flood zones, you can reinforce your roof and add a doorway flood barrier. You can increase your security by installing alarms and window grilles.
Method 5: Get all your insurance from the same insurance company
Sometimes insurance companies will offer you discounts if you have more than one policy with them. If your auto insurance, medical insurance etc are with different providers, see if you switching all of them to one provider will give you a bigger discount.
The upside of this is that you’ll likely get discounts on the other policies too. So the advantages multiply.
Method 6: Improve your credit
You might think it highly unfair for your insurance premiums to be based on your credit. But it is continues to be a common practice. One reason might be that insurers correlate low credit scores with higher risk of property damage.
In any case, paying off your loans and improving your credit score may give you access to better premiums.
Is homeowners insurance tax deductible?
If you’re thinking that higher homeowners insurance is okay because premiums are tax deductible, think again.
Premiums are only tax deductible when they pertain to rental properties. Your home insurance on your home is not tax deductible. So really, there’s no incentive not to shop for a better rate after paying off your mortgage!
Summary: Keep homeowners insurance, but try to lower your premiums
No longer having a mortgage means that you have greater flexibility with your home insurance. While you could technically get rid of your home insurance altogether, it’s best that you continue to have a policy so that the equity you have in the house is protected.
That doesn’t mean that you have to keep paying the same premiums that you used to though. There are many ways to reduce your homeowners insurance, which we shared in the article.
Have you paid off your mortgage? What did it feel like? What did you do with your homeowners insurance? We’d love to hear about your experience in the comments below!