Mortgage 101

What Is a Deductible for Homeowners Insurance?

Published on: June 17, 2022

homeowners insurance deductible

The deductible for homeowners insurance is the portion you pay towards a covered loss. When you file a homeowners insurance claim, the insurer determines the cost of the loss and subtracts your deductible from the claim payment. 

The amount of your homeowners insurance deductible impacts the cost of the policy, so understanding how deductibles work and how to choose the right one for your situation might help you save money.

What is a deductible for homeowners insurance?

The deductible for homeowners insurance is the amount you’re responsible for when you experience a loss covered by your policy. In other words, it’s how you and your insurer split the cost of an insurance claim. You cover the deductible, and the insurance company pays for the rest of the loss, up to the policy limit. 

Usually, the deductible for homeowners insurance applies to property damage and personal items but not to the policy’s personal liability or medical payment coverages. 

When do you pay the deductible for homeowners insurance?

Your deductible amount doesn’t go directly to your insurance provider as your premiums do. Premiums are typically paid out of an escrow account. Instead, when you experience a covered insurance loss, the insurer subtracts the deductible from the claim payout.

For example, if you have a $1,000 deductible and face a $10,000 loss, your insurance company will issue you a check for $9,000 — the amount of the claim minus your deductible. When it’s time to complete the repairs, you’ll pay $1,000 out-of-pocket on top of the $9,000 payment you received from the insurance company.

Types of deductibles for homeowners insurance

The deductible for homeowners insurance can be calculated by a set dollar amount or by a percentage of the property’s insured value. 

Dollar amount deductible

With a dollar-amount deductible, homeowners have a flat amount such as $500, $1,000, $2,500, etc. This type of deductible is predictable and easy to understand; however, you may have to cover the cost of some losses entirely, depending on your deductible amount. For instance, if you have a $2,500 deductible, you’ll be responsible for the first $2,500 of every covered loss you experience. 

Percentage-based deductible

Policies with percentage-based deductibles — sometimes considered high-deductible homeowners insurance — can be more complicated. Rather than a flat dollar amount, these deductibles are based on a percentage of the home’s insured value. For example, if your home is insured for $300,000 and you have a 1% percent deductible, your deductible is $3,000. 

Percentage deductibles vary by policy and state laws and can go from 1% to as high as 20% for specific types of damage and specialized policies. Unlike standard dollar deductibles, percentage-based deductibles increase along with the insured value of the home. For example, if your insured value raises from $300,000 to $330,000 at your policy renewal, your 1% deductible jumps from $3,000 to $3,300.

What's the average homeowners insurance deductible?

The typical deductible for homeowners insurance can range from $500 to $5,000 for dollar amount deductibles. But deductibles vary by state and insurance providers; some insurers allow deductibles higher than $5,000, while others require a minimum of $1,000. 

It can be tempting to go with your policy’s minimum deductible, but you may want to consider a higher deductible. Increasing the deductible will lower your premiums and reduce your housing costs. A higher deductible means you’ll be taking on more risk if you need to file a claim. For example, if you experience a $5,000 loss and have a $2,500 deductible, your insurance will only pay $2,500. And if the damage is less than $2,500, you won’t receive any payment.

On the other hand, choosing a lower deductible will keep your out-of-pocket expenses to a minimum if you have a loss. In the example above of a $5,000 claim, if you had a $500 deductible, your policy would pay $4,500. Of course, the disadvantage of a lower deductible is that you’ll pay higher premiums.

Choosing the right deductible for homeowners insurance

When you purchase a new property, you’ll need to secure a homeowners insurance policy before finalizing the deal. To determine the recommended deductible for homeowners insurance in your situation, consider both the short-term and long-term impact. 

Here are some things to think about before closing on a home

1. Consider how your deductible will affect your premium

Again, the amount of your deductible directly impacts your insurance premiums and home affordability. So you’ll need to decide whether having a higher deductible and paying lower premiums is more advantageous than having a lower deductible and paying higher premiums.

As you decide, be realistic about your ability to pay the deductible in the event of a claim. If you choose a higher deductible, make sure you have enough savings on hand to cover out-of-pocket costs. Your insurance provider can give you multiple quotes to see how different deductibles impact the policy cost. You can then crunch the numbers with a mortgage affordability calculator to see how the premiums affect your total mortgage payment.

2. Decide which type of deductible is right for you

Depending on your insurance company, you may be able to choose between a flat-dollar amount deductible or a percentage-based deductible. Flat-amount deductibles offer a range of dollar amounts and are straightforward. On the other hand, a percentage-based deductible could offer lower premiums, depending on the percentage.

3. Determine if you need a disaster deductible

Your homeowners insurance policy may include hazard insurance coverage with separate deductibles for natural disasters or certain damages. For example, in Texas and other states in “Tornado Alley,” homeowners may pay one deductible for most claims and a separate percentage-based deductible for windstorm damage. Other states may have deductibles for named storms and hurricanes.

You may also have to carry specialized policies such as flood or earthquake insurance in addition to your standard homeowner’s insurance. Make sure you understand how each policy works so you’ll be prepared to handle these additional deductibles. Your insurer will let you know what additional coverage you must carry.

Ready to explore how the deductible for homeowners insurance will impact your mortgage payment? Connect with a local Finance of America Mortgage Advisor today to discuss your loan options.

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