Very few people can afford to pay for a new home in cash. That’s why most home buyers finance their home with a mortgage or other property loan. Once you take out a loan, it is your responsibility to repay it to the bank over the years.
However, what happens if something happens to your home in the meantime? Various hazards could cause significant property, and sometimes those hazards might destroy the home. As a result, both the homeowner and the lender might lose the investment they have made in the property. Still, that doesn’t mean you are off the hook to pay off the rest of your mortgage.
To protect their investment in your property from such hazards, most lenders in Western Massachusetts require property owners to carry homeowners insurance. Usually, this requirement will mean buying dwelling coverage worth at least your home’s replacement cost value. However, some policies pay for your dwelling based on its actual cash value, and you likely won’t be able to buy this coverage.Here’s how each works.
Actual Cash Value Coverage
This is often the cheapest form of protection available for your dwelling. When deciding how much money to issue following a claim, your insurer will consider the home's depreciated value, rather than the value necessary to rebuild the home like new.
A home’s structural value often decreases over time (often even if property values increase). Think of this depreciation in the same way you would a car that loses value the older it gets. Therefore, the money you receive in the end might not be enough to fully repair the home. Most homeowners policies these days do not offer this coverage. Therefore, it is exceedingly rare to find, and most mortgage lenders require buyers to purchase more coverage anyway.
Replacement Cost Coverage
Replacement cost coverage more closely matches the costs necessary to rebuild your home. To determine your home’s replacement cost value, you’ll need to factor in the cost of materials, labor and other assets necessary to repair or rebuild you home. So, if it will cost $300,000 to rebuild your home, then you will need at least $300,00 in structure coverage as your coverage limits.
You might need to periodically review your dwelling coverage limit as a home’s replacement cost changes with inflation and other market differences. A failure to do so might mean that you might not be able to rebuild your home like it was before the damage occurred.
To determine the right dwelling coverage limit, work with your insurer, realtor and lender to calculate the minimum coverage necessary. You can always buy more than this minimum coverage to provide expanded protection against even the costliest losses. The more coverage you have, the better protected your dwelling will be.