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Just as the "average American family" with 3.14 family members does not actually exist, the national average of total income spent on homeowners insurance has little practical relevance to anyone's particular housing situation. The percentage of your income you are likely to spend on homeowners insurance depends upon where you live, your relative affluence and whether you spend more or less than the recommended percentage of your income on housing.
The Federal Reserve Board estimates that homeowners spend between $300 and $1,300 per year on homeowners insurance at an average coverage rate of $3.50 per $1,000. Doing the math, this covers houses costing from about $86,000 to $257,000. A mortgage calculator determines that mortgage payments for the $86,000 house with a 30-year mortgage at 4.5 percent total $4,680 annually. Payments for the $257,000 house run $15,624 annually. If housing costs no more than 28 percent of income -- the figure recommended by Bankrate -- families in these houses have annual incomes from $16,700 to $55,800. Breaking these figures down further, the average budget percentage for home insurance is around 2.24 percent of annual income.
There are some problems with the assumptions underlying these calculations, however. While the recommendation made by Bankrate and others that a family should spend no more than 28 percent of income on housing seems reasonable, that's not the percentage actually spent. According to a 2007 North Dakota State Extension Service study, U.S. families actually spent 32 percent of annual income on housing. If you live near a large coastal city, you probably spend considerably more. If you live on a farm, according to the study, you spend substantially less. How much of your income you are likely to spend on home insurance depends upon where you live.
The homes covered in The Federal Reserve Board's estimates of homeowners costs ranged in value from $86,000 to $257,000. If you live in New York City, however, the average cost of a single-family residence is $1,009,000, which, using The Federal Reserve Board's calculation, means that homeowners insurance in New York City costs, on average, $3,500 annually. But while, city-wide, New Yorkers spend more than the average amount of income on housing, in Manhattan the average mortgage payment is only 20 percent of income. This means that homeowners in Manhattan spend a substantially smaller percentage of income on homeowner's insurance than the national average, about 1.5 percent.
As a rough guide to what homeowners insurance may cost, The Federal Reserve Board's estimate may be somewhat useful, particularly if you live in a Midwestern city and enjoy a middle-class income. If you live on a farm or in a large coastal city, however, what you pay for homeowners insurance may be substantially less or substantially greater. It may also be a considerably greater or smaller percentage of your annual income than the 2.24 percent national average.
- The Federal Reserve Board: A Consumer's Guide to Mortgage Settlement Costs
- Bankrate: Mortgage Calculator
- Bankrate: How Much House Can You Buy?
- NDSU Extension Service: Taking Charge of Family Finances -- How Much Should We Spend?
- The New York Times: In a City Known for Its Renters, a Record Number Now Own Their Homes
- Jupiterimages/Photos.com/Getty Images