As a homeowner, it’s easy to get lost in a sea of mortgage insurance terms. The goal is to have your home adequately covered for unforeseen events while ensuring you’re not spending more than you should. Do you know the difference between your mortgage loan amount and the insured amount? If this is overlooked, you could be paying extra for insurance coverage you don’t need, and every penny counts when you’re a homeowner. Let’s take a look at basic lender requirements and how to determine the correct insurance coverage for your home.
Homeowners Insurance Policy
Also called home insurance, a homeowner’s insurance policy provides financial protection if the homeowner’s house or its contents are damaged. If you’ve financed your home with a 20% down payment or less, you’ll be required to have private mortgage insurance to cover the possibility of default.
This is the total amount of money you’ve agreed to borrow from the lender. This may also include expenses like closing costs and/or loan administration fees. Typically your lender wants you to have an insurance coverage limit higher than your mortgage loan amount to protect you both from financial loss.
The insured amount is the amount of insurance coverage as stated in your policy. It takes into account the cost of rebuilding your home to its current standards. The difference between a home’s market value — what your property will likely sell for on the current housing market — can vary widely from its replacement cost (see below). Here are two examples:
- Not enough coverage: If you have a $200,000 mortgage and the cost of rebuilding the home is determined to be $150,000, you’ll be on the hook for a $50,000 deficit should something happen to your home as the replacement value will come up short but you’ll still need to satisfy the initial $200,000 loan amount
- More than enough coverage: In contrast, if you own a beach house with a market value of $10 million and the stretch of land itself is worth $4 million of that, since you can’t rebuild the land, you’ll only need to purchase replacement coverage for the cost of rebuilding your home or $6 million, a full $4 million less than the market price of your home. This scenario can easily lead to purchasing an excess of insurance coverage you don’t need.
This refers to the amount of money that it would cost to replace something, such as a home, using the same type of materials with which it was built. The replacement cost of your home may include such things as:
- cost/time to obtain building permits
- cost of construction crews
- cost/time to obtain building materials
- cost of hauling the old debris from the site
- regulations affecting work schedules such as with an HOA
What Your Home’s Replacement Cost Should Include
Your insured amount should include the replacement cost of your home as above but it also applies to its outbuildings, other structures, and contents. If you own a lot of high-end possessions such as jewelry or fine art, it’s vital to make a home inventory list including photos and receipts. You may even want to consider purchasing a separate policy to provide full replacement coverage for your expensive items. Plus, it’s easy to keep track of your paperwork and photos when they’re stored on our free DomiDocs home management platform! You’ll have access to them 24/7/365 and all files are completely sharable so you can quickly send information to whomever you choose.
In order to avoid paying more than you should for insurance or not having enough coverage in place when you need it, it pays to seek out a great insurance agent to work with. They’ll help you to understand the terminology and will make suggestions as to the coverage required to help keep you and your family safe. You can also protect your home from title fraud, missed payments, clerical errors, and unpaid bills by signing up for HomeLock™, the most advanced digital property monitoring and scanning available today.
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Author – Connie Motz