How much should you insure your home for? It's a great question, one that we get asked a lot. There are many factors that may influence your decision. But, one of the biggest factors is your loan amount.
In this article, we're going to discuss how your loan amount can affect your home insurance, and why lenders may require that you insure your home for its full loan amount.
How are market value, loan amount, and replacement cost related?
It’s important to know that the amount your house is insured for has little to do with how much the house costs to buy and the loan it takes to finance it.
A standard home insurance package insures your home at its replacement cost. This includes the costs of labor and the materials to build the home (and your belongings, if you opt for replacement cost on your contents).
However, the market value of the home may vary based on a lot of factors. This includes location, competition, the amount and price of the land, etc. So, the loan amount that you take out may also vary, depending on how much you're willing to pay upfront.
Why should I insure my home to its loan amount?
When the loan amount is higher than your home's replacement cost, you should consider insuring your home for the loan amount. In fact, your lender may require it.
There may be instances where the loan that you take out to purchase a home is greater than the amount it would cost to replace the home from scratch. In cases like this, your lender may require you to get insurance that covers the full loan amount, not just the replacement cost, which helps lenders prevent financial loss in the event of a claim.
When should I insure my home for its replacement value?
If your home's replacement cost is greater than your loan amount, you should consider insuring the home at its replacement cost.
Your lender may not require that you insure your home for greater than what you owe. But, insuring your home at its replacement cost will ensure that you can rebuild your home in a total loss claim.
A Helpful Example to Illustrate the Difference Between Loan Amount and Replacement Cost
Say that you have a house that costs $200K to build. If you put the house in Neighborhood A, the price of that home might be $230K. But if you put that same home in neighborhood B, it could cost $350K. None of the labor or cost of materials has changed, only the location.
You can see how the market value of the home and the loan amount can vary drastically, even if the amount it costs to rebuild the home can stay the same.
So, if you get a loan for $300K to finance the house in neighborhood B, your lender may require you to insure the home for that amount, instead of $200K.
If you get a loan for $150K to finance the home in neighborhood A, your lender may only require you to insure the home for $150K. But you should still consider insuring your home at its replacement cost $200K.
21 авг 2024
