(BPT) Much of the country is still in the middle of a red-hot real estate market. Home values are rising due to high demand and first-time homebuyers should be aware of how the value of their home impacts the way their premiums are calculated. Location and structure type are two examples of considerations that can affect home insurance premiums, but so do the features of the home, policy limits, and, in some states, even a homeowner’s personal finances. Policyholders should be aware of the variables that are factored into their insurance coverage.

Location

Location is perhaps the largest component when it comes to the costs of your insurance premium since it deals with exposure and hazard to the home’s physical structure. The type of home you have, where you live and the state or city in which you reside can drastically affect how much you will pay. In fact, location is such a primary factor that coverage in certain areas may require special policies.

For example, many homeowners moved from the city to the country during the pandemic and found that they now live in wildfire- or flood-prone areas and that additional coverage is needed due to environmental risk factors not covered under available homeowners insurance policies in the area. Homeowners living in or near large urban areas may find that their premiums cost more due to the higher cost for construction or repairs.

Take a close look at what factors are impacting the cost of your home insurance rate. The size of your home, regional vulnerability to natural disasters, and different building material options like brick or wood and their relationship to the environment may determine your premium’s cost.

Replacement Cost

The more your home costs to replace, the more you will need in coverage to insure it.

“Replacement cost is a measure of the amount it would cost to replace or rebuild your home after a loss with a similar home of like kind and quality,” said Bonnie Lee, Mercury Insurance vice president of property claims. “This amount takes into account factors such as the square footage of your home, the local construction costs per square foot, and construction details unique to your home.”

While replacement costs refer to the cost of rebuilding a house to the same standard as before, it does not include features such as the neighborhood, amenities, and even proximity to schools which can affect a property’s attractiveness.

“Replacement costs and market value are often used interchangeably, but they are two completely different concepts. Market value accounts for how the neighborhood and its conveniences impact a property’s attractiveness to buyers, while replacement costs only refers to the expense of rebuilding a home after a loss,” Lee said.

Deductible

The insurance deductible is one of the most important parts of a homeowners policy and plays a significant role when determining insurance premiums. The deductible is the amount of money a policyholder must pay before the policy pays out for repairs or a loss.

For example, if covered damage to your home costs $20,000 and your deductible is $5,000, you would be responsible for the first $5,000 in damages and your insurance company would pay the remaining $15,000. Homeowners that pay a higher deductible may decrease the cost of their premiums, but may have to pay more out of pocket when filing a claim. Home insurance premiums are calculated based on a number of factors that homeowners should take into consideration when researching the best coverage for their needs at a reasonable cost.