Home insurance: loan amount or rebuild cost?

[8 Bit WWBG]

I've been meaning to address this for quite some time.

When I first got my mortgage, the bank pulled that scam where they require me to get homeowners insurance in the amount of the loan.

Of course the insurance will not actually pay out the amount of the loan, they will pay out the amount to rebuild the house, which is significantly less.

I have also heard that it is unlikely I will need to insure my land, since land doesn't really burn down. I am not in a flood area.

I am also part of a row of townhouses, so any natural disaster that hits me is probably going to affect at least one neighbor.

Am I able to lower the insurance so that it is closer to what the rebuilding costs are as opposed to the full loan balance? Obviously I won't lower it to below rebuild cost, but why should I pay for insurance on (making up numbers here) $300k when the most it could cost to rebuild the house is $200k? It seems smarter to pay for insurance on maybe $220k?

Or am I missing something?

ETA: I would not reduce things not normally covered like DF's ring, the Picasso (placemat), my collection of classic [matchbox] cars...

[shanendoah]

In this case, what your missing is an insurance agent who can explain it to you and deal with the bank's demands regarding insurance.
Not everyone needs a full service agent, but if you think you need one thing and the bank is trying to push another, you need a person who understands the insurance laws in your corner.
Our agent has always insured our house for rebuild costs. (Which is not the same as the cost of building a house - rebuild costs assume your foundation still exists, all utilities still connected, etc - so its quite a bit less expensive.) I've never had a problem with the banks, but then, I simply contacted my insurance agent and he dealt directly with the bank/escrow regarding the home owners policy, so we didn't even have to think about it beyond our call to him.

[Sum Dum Gai]

I think you're right that all you really need is rebuild cost. When they calculated our rebuild cost it was higher than what we paid for the house though, so it might not always be a money saver.

[8 Bit WWBG]

...:::"In this case, what your missing is an insurance agent who can explain it to you and deal with the bank's demands regarding insurance.":::...

Well if I wanted one of those, I wouldn't have posted here .

No seriously, I do understand that someone fully versed in the laws of this state, and any gotchas I need to know might be worthwhile.

[❤ mollymouser ❤]

We're insured at the approximate resale value of our house in 2008 ~ since then, housing values have decreased but we haven't opted to change our insurance since my preference is to be "over-insured" v. under-insured. (But that's just me!) We're also not in a designated flood zone ~ but we still have flood insurance. And we recently added earthquake insurance and sewer back-up insurance.

I am wondering what the premium difference would be for you between the amount of insurance you are carrying now (mortgage value) v. rebuilding costs. It might be worth asking your insurer ..... to see if the amount is worth arguing with your mortgage company over.

[tskeeter]

Insure for replacement cost.

Lenders frequently require that you insure for the full amount of the loan. However, I'd go for replacement cost and see if the lender comes back and tells you it is under insured.

Things to consider. Your insurance should cover the cost of debris removal. Removing the remains of your house from the site so you can start rebuilding can be as much as 25% of the replacement cost of your house. Your insurance should include coverage for building code changes. If your house is older, or older and in a seismic zone, bringing it up to current build code standards can cost thousands of dollars. Especially if you have to retrofit all of a partially destroyed home in order to get new building permits. In the event of a disaster (think Katrina), construction costs can increase quickly and significantly. If you are insuring against events that affect more than just your home, make sure you have enough insurance to handle a 25% - 50% increase in construction costs. This is a good topic to discuss with your agent to try to dial in the right range.

What would it cost to replace my house? Your insurance agent has tools to do this estimate. For a reality check, you can do it yourself for less than $10 at accucoverage.com. This web site is owned by Marshall and Swift, who are the gold standard guys in construction cost estimating. Many states require that government real estate assessors use Marshall and Swift reference tools to perform property tax assessments. You can expect to spend about half an hour putting information about your homes size and finishes into the accucoverage application.

[Deleted]

If you insure for less than 80% of the cost of rebuilding, you are considered a co-insurer by many lenders. They will only pay 80% of the cost of rebuilding.

My house cost $142,500 back in 2004. I still owe $99,000. It is now insured for slightly over $200,000. The insurance company came up with that figure, not me. Year 1 it was insured for less than I owed (land it is built on is not insured). The cost of materials and labor has significantly gone up, and I want replacement. I would hate for them to give me a 1980 stove because that's what is in here now (it isn't but it was).

I'm not sure you are talking about a significant difference, but use the tool someone else mentioned.

By the way, the insurance on your house usually affects the insurance on your contents. So check that as well.

[midjd]

Is the cost of rebuilding usually lower than the loan? We only put 20% down on ours but the rebuild cost (which is what we're insured for) is nearly 2x the loan. The house burned to the ground in 2009, so unless they had a really crooked contractor I'd think the rebuild price is probably accurate...

[whoisjohngalt]

I have no idea if our lender cared about the insurance we got, but EVERY SINGLE agency gave us a quote for replacement cost. I WISH they would do it for the amt of the loan, which was about $200K less that what THEY considered to be a replacement cost. I've yet to understand where they were getting their numbers.

Lena

[Deleted]

Don't you at least mean purchase price, Lena? Would you absolutely like to start again at $0 (no downpayment) . . . unless, of course, you are underwater?

[upstatemom]

When I audited mortgage loans 12 years ago, it was required that all loans have insurance for the replacement cost of the property. I think federal regulations governed that for any loan the bank wanted to seel on the secondary market.

Even my inlaws who do not have a mortgage have replacement value for their homeowners. I do not think insurance companies insure for less than replacement cost.

[whoisjohngalt]

Don't you at least mean purchase price, Lena? Would you absolutely like to start again at $0 (no downpayment) . . . unless, of course, you are underwater?

I don't understand your question....

[whoisjohngalt]

I do not think insurance companies insure for less than replacement cost.

I can understand and appreciate that in theory. In practice, however, they are getting "replacement" costs from assessed values which have been way overstated.

Lena

[upstatemom]

I believe replacement cost is based on what the regional cost to build a similar structure is, not assessment value. Talk to some local builders to see what the average cost per square foot is for home construction. Use that to evaluate what the insurance company says is replacement cost.

[quack]

Replacement cost and assessment value have nothing in common. Our house burned down in 2001 - it was insured for 125,000 (assessed at 200,000+). Foundations are not included, Land is not insured. The 125000 value was for the building only (contents are insured separately). Be aware that the insurance co. will most likely not provide the total amount you are insured for (we wound up with 90,000 after months of arguments and negotiation), unless the house has completely disappeared, and no fireman worth his hose will let a structure completely burn down (even portions of wall standinig count as "not completely destroyed"!). Also you have to sign papers regarding any lien holders - if you have a mortgage, the insurance payment goes to them, not you, and you're stuck with a hole in the ground and need to get new loans to rebuild.
Contents coverage really really needs to be replacement coverage, slightly more expensive, but then a stove, etc. will be replaced with a 2011 stove, etc., not the vintage 1970 model that was destroyed. I think contents coverage goes to the homeowner, not the mortgage holder, since they didn't loan money for the stove, clothes, etc.

[Savoir Faire-Demogague in NJ]

In practice, however, they are getting "replacement" costs from assessed values which have been way overstated.


Lena,
Replacement costs are determined by prevailing per square foot construction costs. I review this every year with my insurance agent for my homeowners policy on the shore property. She always mentions local construction costs.

[Formerly SK]

"Also you have to sign papers regarding any lien holders - if you have a mortgage, the insurance payment goes to them, not you, and you're stuck with a hole in the ground and need to get new loans to rebuild."

Interesting...that makes sense but I hadn't thought of it before. Thanks for posting your experience.

[brian964]

In my experience it is cheaper getting quotes online. Some of the top insurance companies offer discounts when ordering online, because it is less work for them. But to be safe you could compare rates online, pick the best offer and try a local agency to see if they can match it or do better: www.quotes-center.com/home-insurance-calculator

[ugga81]

You have to remember too that it would often cost more to rebuild a destroyed house than it would to build it new. We just bought a new house (finished in 2010) in January. Our insurance value is about $50K over what we paid. The neighborhood is still being built and there are 8 houses going up on the street behind us. This is where bulk buying comes in. It would cost me more to rebuild my house in 5 years than it does for someone to build it as part of a group today. Plus you have to add in the cost to clear debris and rehab the site. Also, if the loss is the result of a natural disaster (we live in the MidWest where tornados are prevalent) then many people can be affected at once and this makes material costs and construction labor cost go up. Now you have several people all competing for the same contractors and materials.

I always error on getting more insurance than what may be "required". I think you'll find it really doesn't cost any more. In fact, our house from a few years ago was worth less than 1/2 what we paid for this house (same town). Yet our insurance only went about about 20%. Check out different level of coverages and see if you think the extra premium is worth it. Think about what it would REALLY cost to rebuild your place.

[Deleted]

I agree with Skeet's very thoughtful post. Some of my homes are actually insured for more than their market value (including land!). While real estate prices have gone down it's still more expensive to build a single home in some markets than to go buy a new one. And you can bet that if there's a really big fire, like the ones that periodically hit So Cal, contractors are going to charge a premium when hundreds of homes have been damaged.

[whoisjohngalt]

Now you all got me curious, I'll have to look into "construction" costs. The reason I was very skeptical is bc when I was shopping around for the insurance, the difference in numbers was quite substantial. How is it possible that one company would have X as a replacement cost and another company would have X+$100K. Was one of them planning to use illegal construction workers or something?

In any case, all those numbers were much much higher than the selling price or loan amt. I didn't mind as much since I would rather be over-insured than under-insured.

But come December I'll be surely asking more questions.

Lena

[tskeeter]

For those of you who interpreted my comments that Marshall and Swift data is used by property tax assessors as a recommendation that your home be insured for its assessed value, that was not my intent. My intent was to try to convey that Marshal and Swift construction cost information is considered to be so reliable that many states have written laws that require use of Marshall and Swift data in the appraisal portion of the property tax assessment process.

As some posters have pointed out, the assessed value of a piece of property is not the replacement cost of the buildings on that property. Usually, the assessed value of a piece of residential property is considerably less than the cost to replace the home on that property. So, my suggestion continues to be insure your home for what it will cost to replace it.

[Deleted]

Lena,

What's really important is how "replacement cost" is worded into your policy. Before the big Oakland fires in CA, there used to be a "guaranteed replacement cost" rider. It's no longer offered in CA (and I'll venture to guess in most areas). The problem was that long time owners were not adjusting their values upward (and I'll guess a few agents were accommodating complaints about increased costs). So there was a very ugly period where homes were very under valued, charges of fraud, ET cetera. I think it took years for some folks to be compensated.

Now you can buy policies that have 20% extra for "code upgrades" but that's the best I've heard with respect to the big insurers.

[share88]

It would not hurt to confirm that the replacement cost has some sort of adjustment factor for inflation. Mine goes up slightly at renewal, based on a predetermined formula. I don't honestly know if it is enough, but it is something.