Buying a home is perhaps the biggest investment that a person will make in their lifetime, so it is no surprise that homeowners insurance is the next course of action to protect that investment. However, there are a lot of common misconceptions that people have, especially first-time home buyers, about what a home insurance policy actually covers. Market value vs. replacement value explained.

While you may have purchased your beautiful new property for $500,000, that amount is only the market value of your home – or the amount of money that you would be willing to pay for that property at a given moment in time.

“The market value of a house depends on a variety of factors such as the value of the home itself, its location, the land on which the home is built, the age and architectural style of the home, and the price that other homes in the area are selling for. This value can differ from year to year and is also affected by the current overall housing market.” – Michael Cole, owner of Cole Consulting group, representing Rockingham Insurance.

When it comes to insuring your home however, the market value is only part of the total equation. The cost of your insurance policy may be higher or lower than the market value of your home. Homeowners insurance is based on replacement cost – or what it would cost for your insurance company to rebuild your home from the ground up. 

“The replacement cost can also be variable, based on the current price of construction materials or labor. Typically, the insurer will cover materials of a similar type and quality to the original home, within the limits of your coverage. Furthermore, in some policies, the replacement cost will also include coverage for your personal property within the home. If you are not sure what your individual policy covers, consult with your personal Rockingham Insurance agent for clarity.” – Michael Cole, owner of Cole Consulting group, representing Rockingham Insurance

Why does market value vs. replacement value matter? If you base the amount of coverage you need on the market value instead of the replacement cost, you will either end up over-insured, paying much more than you need to, or under-insured, with a policy that does not cover the full cost of rebuilding your home should a disaster occur.

The market value of your home, as well as its replacement cost, are variable. If it has been a while since you obtained your homeowners insurance, it is a good time to consult your local Rockingham Insurance agent to update your policy.