Apart from buying a new home, searching for homeowners insurance with the best coverage can be one of the most important decisions you’ll ever have to make. You’ve chosen the location, you like the design, and your family just can’t wait to call it your home. But behind every pleasant thought that acquiring a new home can give, is a harsh reality that the risk of losing it at any point always remains. You have to protect your property, and you need to safeguard your family.
When it comes to choosing a homeowners insurance policy, knowing the value of your home and the cost of rebuilding it will help you decide on how much dwelling coverage you will need. The question is in the case of a major disaster or a total loss, will your coverage limit be enough to rebuild your home? If your dwelling coverage equals your home’s actual market value, maybe it can, but only to a certain degree.
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Replacement cost and market value, what’s the difference?
Replacement cost is the amount needed to rebuild your home to its original condition with the same quality of materials, regardless of any difference in cost. If you bought a brand new home five years ago and it gets totally damaged by a tornado, the cost of rebuilding it, despite the difference in cost of materials or labor, are all factored in your replacement value.
Market value or the actual cash value is the amount that corresponds to the prevailing market price of your home, the land that it is built on, and market forces that affect the value of real estate properties. Market value takes depreciation into account, meaning that the amount you bought your home for, may no longer be the same amount that it would be as years go by. If you bought a home at $300,000 and had it covered for the same amount, inflation and the rising cost of materials would make your home underinsured. After a certain number of years, the amount of dwelling coverage you bought may no longer be enough to rebuild it, leaving you no choice but to shoulder any difference from your own pocket.
Check our our article, Actual Cash Value Vs Replacement Cost Home Insurance, which defines the actual cash value and replacement cost in more detail.
What’s the importance of replacement cost in buying homeowners insurance?
Unlike market value or actual cash value, a dwelling coverage based on replacement value protects your home against the cost of inflation. Regardless of how much difference there is between the cost of rebuilding your home versus its purchase value, your home will be totally rebuilt event if the cost is doubled. Knowing your home’s replacement cost truly safeguards you against any untoward event of catastrophic proportions.
How to calculate home replacement cost?
Why not? Doing the calculations yourself spares you from the expense of hiring a professional appraiser. If you choose to trust your wit in doing the computations, here are some facts that can help you arrive at the magic number:
- Get in touch with your local builder and find out about the prevailing cost of building per square foot. Multiply it by your floor area.
- Secure accurate information about the cost of the same materials used in building your home. Find out how many floors tiles, roof panels, wood moldings, plaster, and other materials cost and have a good estimate of the needed quantity.
- Do not forget to include an inventory of your personal possessions and their cost as you do your estimate.
Online replacement cost calculator
There is a good number of online cost calculator tools that you can use free of charge. Similar to doing DIY calculations, an accurate inventory of the specific materials, the needed quantity, and the value of all your personal possessions will be necessary. When using an online cost calculator, the accuracy of your list determines the accuracy of your number.
Appraisal by a 3rd party inspector
Usually, your prospective insurer will send their own appraiser or will subscribe to the services of a professional contractor to get the job done with the highest level of accuracy. While this method can give the most reliable value, it pays to keep in mind that he/she is a representative of your insurer who will protect their best interest. If you can go by your insurer’s own appraiser, then it’s perfectly fine. But if you need to have their numbers verified for your peace of mind, hire your own appraiser.
A 3rd-party inspector will provide you broad insights on the information you need. He/she is very likely to have thorough information about the cost of materials and labor from many locations, including your own. Although hiring your own appraiser will cost you an amount, your peace of mind on the information they provide will surely prove its worth.