Homeowner’s insurance replacement cost and sufficiency
Taking a shot here that an in-the-know person will be able to advise. I am trying to revise our homeowner’s insurance policy, which has skyrocketed recently, like everyone’s. It got me thinking about rebuild values. In the event of a total loss, I would not want to rebuild as is, and would likely reduce square footage by at least half. This is in the effort of building back to the level of sufficiency for our family.
I am not sure this is allowable regularly or in our specific case. I have been reading that mortgage lenders often require replacement value coverage for homeowner’s insurance. In my mind, it would seem to make sense that the minimum required homeowner’s insurance is the outstanding amount of the mortgage, but there may be other variables involved here that I don’t understand yet.
While tangential, I think this is germaine to this forum. If 80 million single-family houses in the US are all insured to replacement value, with no way to insure for a smaller rebuild, we are guaranteeing that turnover in these homes will see them build back as big as they ever were, and lose opportunities for rebuilding aimed at sufficiency.
Anyone know whether purposefully and dramatically lowering the replacement number on the insurance is possible?
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Replies
If the insurance encouraged one to rebuild anything different than the existing some would be embolden to burn the house that they no longer desired and use the insurance payment to build what they want now.
Walta
In practical terms, the bank has a lien on the property so the insurance company will make the check out to you and your bank jointly, meaning if you rebuild, the money goes to the lender and then they decide how/when to disburse it to ensure that their interests are protected.
The mortgage holder may negotiate with you or they may not. Check the mortgage documents as some have language that requires you to maintain the condition of the existing improvements (house, etc), or prevents you from reducing the value of the property used as collateral (land value is not considered).
If you really want to, contact the bank and ask what the minimum coverage is for your property, and then buy that.
I have the opposite issue - I don't think the standard policy would actually fully cover the rebuild cost for my house. Construction costs are rising quickly and the most likely scenario for a full loss is a regional natural disaster that would further increase construction costs. So I have in the past asked for a higher coverage.