You are buying your first home. You have a maximum purchase price budget in mind and your mortgage is pre-approved. Now the bank is telling you that you must get Homeowners insurance and that you will have to keep paying it until you pay off the mortgage. The bank also wants to be listed on the policy, so they get the loan repaid, if something happens to your house.
Homeowners insurance usually gets paid through the bank’s escrow account, as part of your mortgage payment. It’s possible to pay it separately, but most people combine property taxes and insurance into the mortgage payment and let the bank send out the associated payments.
You realize that this is a significant annual expense and you want to get the best deal. After all, you will be paying it for as long as you have the mortgage.
So, you start getting quotes. You call your auto insurance provider and get a quote with them, then you get a few online quotes. And all this time, when you are entering the Value you want to insure, you might be using the Sales Price – and that’s not correct.
Should you use Market value, Appraised value, Tax Assessed value?
Nope
You should be insuring your home using the Rebuild Value!!!
Here’s why:
- FAIR MARKET VALUE of the house is the average sales price of similar houses in the nearby area. This amount fluctuates due to market demand and very frequently does not include improvements made to the property (if the property has not been sold and appraised in a long time). This amount can be found through real estate listing services like Zillow.
- APPRAISED VALUE is given when an appraiser comes out to the house, looks it over and gives a valuation. This is usually done during a sale, financing, or refinancing. The appraiser takes under account the Market value and the Rebuild value of similar properties.
- ASSESSED VALUE – Your property taxes are based on Assessed value.
Every year of your real estate ownership, you get a letter in the mail from your local County Tax Assessor. This letter shows you what the county assesses your property to be worth. The current year’s Assessed Value is listed next to the Value from the previous year, so you see the difference right away.
Normally this value is lower than the Fair Market Value. Frequently, it is much lower and this is great news for the owners. They get to pay less taxes.
Assessed values that are higher than the Fair Market Value are not good. That means that you are overpaying in taxes. You will need to contact you taxing assessor to get the property re-assessed.
Assessed value can be wrong if the house has not been on the market in a along time.
- REBUILD VALUE – is how much it will cost you to Rebuild your insured house from scratch. Usually this number is quite higher than the fair market sale value. This is because contractors charge much more to rebuild 1 house in an existing neighborhood, than they would to build a house as a part of a large project, while building a new neighborhood.
- Just imagine if your house got burnt down and had to be Rebuilt, with all of the current structures and utilities around it.
Building vs. Re-Building:
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- Now imagine Building the same house but in an open field, without any restrictions (the way it was built originally). Rebuilding would be much harder, right? Especially if the house is in a densely populated area. That is why the Rebuilding Value is usually a bit more than the Fair Market valuation.
Real-world example of these values based on a suburban household in a large city in Texas (2021):
Fair Market Value: $210,000 – this is the average similar home sale price in the area.
Appraised Value: $235,000 – this is the appraised value by an appraiser prior to placing the house for sale on the market, based on modifications and the state of the property.
Assessed Value: $185,000 – since the house has not been on the market in over 15 years, the County does not know of any modifications. County assesses the house using the property’s condition during the last sale. As you can imagine, a lot can change in 15+ years, but the property’s owners are happy to pay lower taxes because of that.
Rebuild Value: $290,000 – This is what the insurance company estimates that it will cost to rebuild this house. This is the value including the modifications that were done over the years.
As you can see, Rebuild Value is the highest.
That is why if you want to have the maximum protection, you should use that number as the basis for your insurance.
PRO-TIP
You usually get a good discount on the Homeowner’s policy, if you insure the home for over 90% of the rebuild value.