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Home Insurance and Reconstruction Cost

A common point of confusion exists between mortgage companies, insurance companies, and clients when it comes to the amount of insurance needed to cover a home. This confusion arises from one simple fact - all parties involved are completely separate entities, with different goals to accomplish. To navigate this process, it must be understood what is important to each party and what a home insurance policy is actually designed to cover.

When it comes to home insurance, the focus of the mortgage company is to make sure there is enough insurance in place to cover the amount of the loan that has been offered to the client. Nothing more, nothing less.

For clients, the goal is often twofold.  First, make sure there is enough coverage to satisfy the mortgage that is being obtained. Second, and particularly common this day and age, finding the lowest cost of insurance obtainable. While this type of thinking seems logical, it is certainly not the best way to purchase home insurance.

The goal for insurance companies is to provide a home insurance policy that is capable of completely replacing a home in the event it is destroyed. That said, an insurance company or agent has to determine what it will cost to replace a home at today’s standard and cost. It is not uncommon for the correct replacement cost to differ from market value or even the loan amount offered by the mortgage company. Replacement cost is determined by running a reconstruction cost estimator.

A reconstruction cost estimator is the best way to determine how much insurance should be applied to a home. Reconstruction cost estimators take into account the specific details of a home as well as present day labor and material cost. The estimator will then apply an appropriate replacement figure to ensure a home can be rebuilt or repaired after a loss.

Note, at no point during this process will purchase price, loan amount, or land value have any impact on generating an appropriate replacement cost. This is a rather common misconception amongst consumers and even mortgage professionals.

It is important for home buyers to understand this process to appropriately protect themselves and their homes. Knowing what is important to each industry during the home buying process will give any client a competitive advantage. 

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Allied Insurance at The Insurance Loft

1630 Welton St. Ste. 202
Denver, CO 80202
1 (888) 688 1446

By Brian Cook