There are many ways to value a home. Let’s consider the different ways and how to obtain adequate home insurance coverage. If you prefer, you can simply call your agent at Compass Insurance, serving Centennial, CO and the surrounding area, and make them do all the work. They will review existing insurance that you have, if any, and give you a professional recommendation that you can rely upon as being in your own best interest. To be a better-informed consumer it is helpful to know how home valuations are calculated.
How does valuation work?
A home has five valuations, which are:
1. Private Mortgage Insurance (PMI)
2. The Purchase Price
3. The Resale Value
4. The Reconstruction Cost
5. The Replacement Cost (including the contents)
Over 60% of homes in America are either not insured or underinsured. That risk you want to avoid.
Private Mortgage Insurance Valuation
Private mortgage insurance (PMI) is sometimes required by a lender to close the loan. This adds a monthly premium included in the monthly mortgage payments. This insurance only covers the remaining balance on the loan for the home.
PMI does nothing at all to protect a homeowner. It is often wrongly thought by the homeowner to be adequate insurance, which it is not. It does not cover any money paid for the down payment or the closing costs to buy the home. It does not cover any equity value that might increase over time.
Purchase Price Valuation
The purchase price is easy to calculate. You simply look up the total price paid including the down payment and the closing costs in the document to buy the home. Insuring a home for the purchase price is also underinsured for two reasons. Usually, the home goes up in value or it becomes more expensive to rebuild it if it is destroyed.
Resale Value
The resale value is what the home would sell for to another person. This is estimated by using three comparable homes that are listed for sale. They should be as close to the characteristics of your home as possible. Usually, this value is higher than what you paid for the home but not always. In depressed real estate markets, homes sell for a fraction of their purchase price. Those homeowners are "underwater” because the homeowners owe more for the home loan than what it is worth.
Reconstruction Cost
This value is the average price of construction of a new home of the same type in the same area. This is the gold standard for home insurance coverage. It needs to be regularly updated as construction costs increase or the home is improved.
Replacement Cost
This adds to the gold standard and may be set up to cover the cost to replace anything lost including the contents of the home, up to the policy limits.
Summary
Now, that you are well-informed, talk over your circumstances with your agent to make sure you have adequate coverage. Ask about flood insurance too, which is a separate coverage that everyone needs. To get an insurance review and a quote, contact your agent at Compass Insurance in Centennial, CO.
