In today’s housing market, many homeowners have chosen to reduce their insurance coverage based on falling market prices in their area. What many people don’t understand is that a home’s market value is not the same as its replacement cost!
Not insuring your home for its full replacement value, especially if it’s more than the current market value, can be risky. Homeowners need to have a complete understanding of replacement costs, so that they can make an informed decision.
Like many commodities or products, market value is determined by supply and demand. It is the price at which a home can be bought or sold at a specific time, based upon its location, condition and other factors.
Replacement cost is based on an estimate of what it would cost to rebuild a similar structure on the same site, with the same kind and quality of materials. Rather than being based on the price the home would bring in today’s market, it is based on the cost of building materials, labor and the use of equipment. These differences can amount to many thousands of dollars!