Your making a BHM… - Posted by Soapymac
Posted by Soapymac on November 12, 1998 at 08:06:56:
thinking this way!
It is a BIG…HUGE…MISTAKE TO EQUATE THE VALUE OF YOUR HOUSE TO YOUR MORTGAGE AMOUNT!
Now that I got that off my chest, let me share with you the purpose of Homeowners insurance.
Homeowners insurance is simply used to make the home “whole” again in case of a conflagration that results in damage to the biggest purchase you’ll ever make.
Properly designed, the policy will provide the necessary replacement monies to rebuild the home. The REPLACEMENT COST VALUE of the home, as far as insurance is concerned, HAS ABSOLUTELY NO CONNECTION to the sale price of the home or the mortgage carried on it.
The insurance is to provide money to rebuild the home (replacement cost). Where does the 80% figure come in? Generally, as long as the insured value of the home is within 80% of the replacement value, your insurance company will not give you a hassle with the cost of rebuilding your home.
If your home is insured for LESS THAN 80% of the replacement value, they will only cover up to that percentage of the replacement costs.
Example: Your home is FMV’d at $160,000 and breaks down like this:
Land ----------> $60,000
Improvements—>$100,000 (this is the home itself.)
You have a fire that results in a total loss of the home. The question is, what is the replacement cost to make the home “whole” again?
Insurance agents use a replacement cost estimator from the insurance company. If the estimator says it will take $125,000 in labor and materials, then…
your 80% insurance figure is $ 100,000
But what if you only have $87,500 of insurance? That amount is only 70% OF THE REPLACEMENT COST. Therefore, the insurance company is only obligated to pay up to $87,500. YOU HAVE TO COME UP WITH THE REST. And the beat of the mortgage goes on…and on…and on.
That’s right…even if you had a fire, your mortgage will STILL BE DUE each and every month. The bank is listed as an additional insured to protect THEIR ASSET…YOUR HOME.
You see where this is leading. You can’t come up with the rest of the money, so you split. Now the bank is on the hook for the rest of the money to make the house “whole” so after they foreclose, they can rebuild, resell, and recoup.
That’s why the bank told you the 80% figure…to protect THEM…NOT YOU.