Accidents happen all the time, which is why homeowners insurance is so important. Purchasing a new home is exciting, but it also entails choosing the right home insurance for you and your family.
Often, new homeowners don’t understand the cost of homeowners insurance. Many say, “I don’t need that much coverage” or “my house isn’t worth that much.”
It can be difficult to justify paying for homeowners or renters insurance when the cost seems to outweigh the reward. While it looks like a lot at first, when you look at the breakdown of homeowners insurance costs, it will help you get back on your feet if anything happens to your home.
Homeowners insurance is important, but new homeowners are often unsure what a standard homeowners insurance coverage entails.
Standard home insurance has two main coverage options: market value and reconstruction cost. While they both pertain to the worth of your home, they are vastly different and can vary in cost.
In this blog, we will break down the difference between loan value, market value, and reconstruction cost and discuss why it’s necessary.
What does loan-to-value ratio mean?
A loan-to-value ratio (LTV) involves the loan amount and the market value of the property. While LTV can be applied to secure loans, it is most often applied to mortgages for homeowners.
Lenders determine the cost by taking the loan amount, dividing it by the home’s current market value, and multiplying it by 100. This helps lenders determine how much risk they will be taking.
When the LTV increases, the lender’s risk is higher if the borrower does not repay the loan. Typically the higher the LTV, the higher the interest rate.
So, what is considered a “good” loan-to-value ratio?
A good LTV ratio is usually 80% or less for traditional mortgages. However, there are ways to lower LTV ratio costs. You can reduce it by making a bigger down payment and staying within your budget when searching for a home.
What is market value, and why is it important?
Market value is the price your house is currently worth on the market.
It’s what a potential buyer would pay for your home, including your land. It doesn’t include reconstruction costs. This means that if you insure your home based on its market value, you may not receive full coverage depending on the damage done to your home.
The purpose of a market value is to determine the value or worth of your property. Your home’s market value also takes into account your neighborhood, school district, scenic views, weather patterns, and other factors. This can boost your property value.
There is no precise or one way to determine the value of your home. It’s essentially what someone is willing to pay for it.
However, many online sources will help you calculate the market value of your home to determine how much you should insure your home for. You can also consult with our team at MWI Insurance Brokers to help you pick what’s best for you and your home.
What is a reconstruction cost, and why is it important?
Reconstruction cost is the price it will take to rebuild your home to its same quality and condition.
This encompasses the quality of construction, including materials and methods. However, if insufficient materials or methods were used, alternative options will be used to rebuild your home.
When you choose this coverage, your insurance company will reimburse you for construction costs based on the size and structure of your home.
The best way to get an estimate for your reconstruction cost is to consult with a reconstruction professional or our team at MWI Insurance Brokers. While your land is included in the market value of your home, it is not included in the reconstruction cost.
Reconstruction also does not include personal belongings. However, depending on the insurance company, you can pay additional costs to cover your home and belongings.
Is market value or reconstruction cost better?
The coverage you choose is based on what is best for you and your home.
The difference in cost between the two coverage options will probably be a contributing factor in your decision.
In some cases, your market value will be higher than the reconstruction cost because your market value includes land value. However, since replacement costs include construction materials and labor costs, it could be higher than your market value. It all depends on the location and condition of your home and the damage done to it.
The advantage of replacement cost is that it will cover the majority of any damages done to your home as long as it is a covered peril excluding normal wear and tear. It gives you and your family the financial cushion you need to recover from a disaster and rebuild your home. For complete protection, you should insure your home for at least 100 percent of its estimated replacement cost.
One of the disadvantages of replacement cost is that it changes over time. Between home renovations and construction material and labor cost fluctuations, your replacement cost could increase.
You should annually review your homeowners policy and update your insurance company on any home renovations. You may want to consider a policy that includes an inflation guard,which automatically accounts for inflation.
Since market value is an estimated amount of the worth of your home, it doesn’t include the exact cost of construction materials like reconstruction cost. Many homeowners who select this policy own property whose value may fluctuate over time. This policy is especially beneficial to people who own farmland.
One of the disadvantages of market value is that you may not receive full coverage for the damage done to your home. If an insured disaster destroyed your home, your insurance company would pay the estimated replacement cost instead of the actual replacement cost. Depending on the damages, you risk incomplete coverage.
Neither market value nor reconstruction cost is necessarily better than the other. It depends on your property and your location.
How MWI Insurance Brokers Can Help
Finding the right insurance coverage for you and your home can seem challenging and overwhelming at times, but it doesn’t have to be.
Here at MWI Insurance Brokers, our team is equipped and ready to help you choose the best homeowners insurance coverage for you.
Located in Oklahoma City but serving the entire state of Oklahoma, our team knows the area and is prepared to find you the homeowners insurance you need, so when disaster strikes, you are prepared.
Request a quote today, and our team will help you find the insurance that best suits your needs while making sure it’s affordable.