How Much is Your Home Worth to You?
When asked about the value of their home, the vast majority of homeowners will say it is how much they paid for their house. Others may believe that due to improvements they’ve made, their home value is what it would be appraised at today. Unfortunately, these numbers may not even come close to the amount necessary to rebuild your home in the event of a catastrophic loss. There is a distinct difference between market value and replacement cost.
Market value is the price you would pay for a home. Replacement cost is the amount necessary to replace your home using comparable materials.
For example, let’s imagine there are two homes located side by side. They were both built in the same year, and they both have the same square footage. In fact, when they were built they were nearly identical. However, one home has been abandoned for the last 20 years, while the other has been lovingly cared for. The market value of the abandoned home would be drastically lower than its neighbor’s. But if a fire were to burn them both to the ground it would cost the same amount to rebuild them.
What factors are included in the cost of rebuilding a home?
Rebuilding a home is ALWAYS more expensive than the construction of a new home. There are a variety of reasons. For instance, with recent increases in wages, the cost of construction labor is exponentially higher than it was just ten years ago. The price of materials has also seen a drastic increase, not only due to inflation but also because of the costs associated with the transportation of materials needed to build a home. If you live in a subdivision, your home may have been built at the same time as the rest of the homes on your street. More often than not, there is a large discount available on materials when they are purchased in bulk. These discounts will not be available during a rebuild.
What are your options when it comes to insuring your home?
When purchasing homeowners insurance, you can choose between Actual Cash Value (ACV) and Replacement Cost (RC). ACV is calculated as the replacement cost of your home minus depreciation. Assuming your home has a replacement cost of $200,000 and the depreciation is $30,000, the actual cash value of your home is $170,000. This would leave you $30,000 short to rebuild your home. Now assume that you still owe $180,000 on your mortgage. You are stuck with a $10,000 bill that your insurance will not cover.
What is the solution?
Thankfully, replacement cost is available to protect you from such examples. Replacement cost does not just protect your home; this coverage is available for the contents of your home as well. At Burkhart Insurance Agency, replacement cost coverage is our standard. Our educated agents are trained to be sure you are adequately covered in the event of a loss. Call us at 812-882-3600, or stop by our offices for your quote today!