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After you renovate your home, beware of this rising cost

MoneyWise logo MoneyWise 6/15/2021 Sigrid Forberg
a house with a fence in front of a brick building: House under renovation. © AAS / Twenty20 House under renovation.

The COVID pandemic set the restaurant, travel and retail industries back years — not to mention the huge hit inflicted on the overall American economy in 2020.

But one industry, home improvement, saw record-breaking sales last year. And they’re not set to let up anytime soon.

With everyone stuck at home, and with little else to spend their money on, many Americans are focused on getting both their financial house in order, by paying down debt, and their actual house in order, by renovating and remodeling.

But what does that mean for your homeowners insurance rates? Here’s more on the renovation phenomenon and how it may end up costing homeowners more than they realize.

What’s happening with home renos?

Zivica Kerkez / Shutterstock © Provided by MoneyWise Zivica Kerkez / Shutterstock

Annual spending on renovations and repairs were expected to rise from $332 billion to $337 billion by mid-2021, according to analysis by ResearchAndMarkets.com.

The site says renovations will likely speed up this year as homeowners have become more confident in their skills to take on more ambitious projects.

And a survey run by Lowe’s last December found that 46% of respondents had spent money on home improvements last year that would normally have been spent on other things.

Looking ahead to 2021, 84% indicated they’ll continue to spend some of that money on home improvements even after the pandemic ends.

Why are renovations getting more expensive?

Emma Cleasby sitting at a desk in front of a computer: opkirilka / Twenty20 © Provided by MoneyWise opkirilka / Twenty20

Even as home renovations are becoming more popular, they’re also becoming more expensive.

There are a few reasons for this:

  • Inflation. As we approach the end of the pandemic, the economy has been rebounding. And so too has inflation. In April, the Bureau of Labor Statistics recorded the rate of inflation rising to a level not seen in 12 years. And it ticked up again in May. Rising inflation means everything costs more, including building materials and labor.

  • Increased competition. Because everyone’s keen to do a home project, contractors are busier than ever. And when the demand increases for their services, so do their prices.

What about my homeowners insurance?

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Most homeowners are prepared for how much it’ll cost to do a major home renovation project, but don’t consider the homeowners insurance implications.

Increasing the value of your home could very well result in an increased cost to insure it.

However, it’s important to note the value we’re talking about here isn’t the resale value; it's the rebuilding cost that your insurer would be on the hook for if anything were to happen to your home.

A fresh paint job or landscaping may increase your home’s market value, but they shouldn’t impact the value of your home from an insurer’s perspective. However, if you’re looking at adding square footage or fixtures in your home that will increase its overall replacement cost, that’s when your insurer is likely to increase your premiums.

There’s also the matter of climate change, which has been tied to surging prices in the insurance industry, most American homeowners can expect to have to pay more for their coverage.

Over the last 15 years, the number of natural disasters that have caused $1 billion in damage have been on a steady rise, according to findings from researchers for Deloitte. Insurers must now factor those costs into their underwriting and pricing decisions.

Add it all up, and it's more important than ever to make sure you regularly shop around for the cheapest homeowners policy that fits your specific needs.

Why it’s important to tell your insurer about any renovations

a person sitting at a table using a laptop: orathaim164 / Twenty20 © Provided by MoneyWise orathaim164 / Twenty20

If you’ve done some major home improvements over the last year, you may be wondering if you can avoid reporting them to your insurer to save yourself from added costs.

A recent study shows most homeowners are OK with lying to save on insurance costs. But if you ever needed to file a claim, those lies (or omissions) could cost you big.

Let’s say you renovate your basement to add some extra living space to your house but don’t update your home insurance. That means if you ever have to make a claim, your insurer could reject the costs of any upgrades they didn’t know about and you’ll be out of pocket for the cost of repairs.

The good news here is that some projects, like adding an alarm system or updating your plumbing or electrical systems, can actually cause your home insurance costs to drop, which means reporting upgrades doesn’t necessarily always cost you money.

How to get your house in order

a woman sitting at a table using a laptop: DimaBerlin / Twenty20 © Provided by MoneyWise DimaBerlin / Twenty20

If these rising costs have you concerned, there are a few ways you can help offset both the costs of your home renovation and the impact it has on your insurance premiums.

  • Use a cash-out refi to pay for your project. Now’s the perfect time to take advantage of low mortgage rates and the equity you’ve already built up in your home. With a cash-out refinance, you can get the cash you need to pay for your project.

  • Shop around for quotes. Ask a few different contractors to give you an estimate of how much your project will cost. Keep in mind that Home Advisor says most remodelling or renovation projects will cost you about $10 to $60 per square foot, depending on where you live and which room you’re working on. But don’t just go for the cheapest quote, make sure you also vet your professional to ensure they’re both trustworthy and have the skills to get the job done.

  • Compare rates to find the lowest price. As you would with looking for a contractor, the best way to ensure you save on the cost of your homeowner’s insurance is by shopping around for the best rate. Just by comparing quotes, you could potentially save yourself hundreds of dollars a month.

  • Make savings your policy. After you’ve locked in your home insurance rate, why not turn your attention to your other insurance policies? If it’s been a while since you looked for a better price on your auto insurance, it may be costing you more than $1,000 extra every year. Shop around to ensure you’re paying the best possible rate. And then use the same trick to save hundreds on health insurance, too.

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