Many people look to save a few dollars on their home insurance premium by insuring their home for less than its replacement value. While this may save a few dollars now, it will cost you thousands later. Your homeowner’s insurance policy, if it is written correctly, can repair and or replace your current home with “new” like kind and quality materials. Amy Bach, executive director of the consumer advocacy group United Policyholders, says one 2019 study found that two-thirds of U.S. homes are underinsured. Why? For one thing, many homeowners buy only enough insurance to cover the amount of their mortgage. But the mortgage may be, at most, 80 or 90 percent of the value of the house, depending on the original down payment (less, if the home has appreciated in value).
- Market Value is the amount you might sell your home for based on real-estate conditions in your area.
- Appraised Value is the term that describes what the local government uses to determine your property taxes.
- Replacement Value is the amount it would cost to rebuild your home with like kind and quality. The replacement cost, however, is based on the total cost of labor, activities, and materials to put the structure back to the way it was before the damage. This would include costs related to clearing and cleaning up the damage debris -activities that precede the actual build-out of the home.
Replacement Cost Considerations
There are a number of factors that go into determining your home’s replacement value, including:
- Type of construction quality
- Materials used in the construction
- Size of your home
- Your lot configuration, (hillside or flat)
- Are there any unique materials, like imported stone, marble, etc.?
- The overall quality of construction—is your home average construction or high-end?
- The average cost per square foot for new construction in your area.
We always recommend you insure your home to the full replacement values and have an inflation cost factor added annually.