At the beginning of the COVID-19 outbreak, housing experts were predicting a crash in the market. That did not happen. Instead, home prices in the United States skyrocketed an incredible 37% in the two years between March 2020 and March 2022.
Home prices have been inflated by as much as 25%. Because of the dramatic increase in home values, you may be wondering if your current homeowners insurance policy is still sufficient enough to cover you in the event of a loss. This depends greatly on two factors, whether your home is insured using market value or replacement cost.
What is market value?
Market Value refers to the amount your house and land would sell for on the real estate market. Factors that may determine a homes market value include but are not limited to: your neighborhood, school district, crime rates, and values of others homes in your surrounding area.
What is the difference between market value and replacement cost?
As an example, let’s say that your home has a market value of $450,000. Current construction and materials costs are $500,000. This would mean that you would be left with a $50,000 coverage gap. Your options moving forward would be to build a smaller, less expensive home, or to pay the difference out of your own pocket. There is a way to avoid this. It is by obtaining Guaranteed Replacement Cost coverage.
What is replacement cost?
Replacement Cost refers to the estimated amount of money it would cost to repair or rebuild your home with the same or similar materials in the event of a total loss. The cost of building materials may fluctuate, so it is important to keep that in mind. Additionally, contractors hired to do the building may cost more or less depending on certain situations.
What is guaranteed replacement cost?
Guaranteed Replacement Cost is the best coverage you can have when it comes to protecting your home. By obtaining Guaranteed Replacement Cost coverage, you are guaranteed to be protected against a claim on your homeowners policy. If your house burns down, this coverage will guarantee that your home will be rebuilt back to its original state before the event occurred.
ALERT: If you have any improvements to your home that are valued at $5,000 or more, those need to be reported to insurance company within 90 days! This is extremely important to remember!