This year in the U.S. we’ve seen many devastating events, such as wild fires, tornados, flooding, and a hurricane, which have affected many homeowners. In the aftermath of these events, it is even more devastating for homeowners to find out that their property is underinsured.

As I’m sure most people are aware, the severe economic downturn has resulted in declining real estate market values. However, the replacement cost to rebuild your home following a loss has not declined.

In many areas of the U.S., the cost to rebuild a home now exceeds its market value. While some homeowners may think their insurance coverage amounts should decrease due to lower home values, this is not the case.

The difference between the market value and the replacement cost of your home is:

• Market value is the current price at which your house, the surrounding land, and all included structures, such as detached garages, sheds, or swimming pools, can be bought or sold. This value varies based upon the supply and demand of real estate in your area. Some factors that determine the value include: the condition of the home, location, the condition of neighboring properties, the quality of the school district, and property taxes.
• Replacement cost is the current price to rebuild your house as it is now, in the same spot, using the same type and quality of materials, and at the same level of craftsmanship. The replacement cost doesn’t include the value of the land or any of the structures on the property. This price will vary depending upon the materials, labor, and equipment used to reconstruct the house. The replacement cost is not the home’s purchase price, the outstanding amount owed on the mortgage loan, or the property assessment figure used for taxes.

In a fourth quarter 2010 study of several metropolitan areas, large disparities between the market value and the replacement cost can be seen. This is especially evident in the Sunbelt area where real estate values have taken a big hit.

While some homeowners want to save money when buying insurance, you need to make sure you have adequate coverage in case of loss. Who wants to only replace part of a home because that’s all the insurance coverage they have? Therefore, regardless of where you live, you should insure your home for at least its full replacement value. Additionally, you should keep track of current market conditions in your area, reviewing and adjusting your coverage amount periodically. For more information on your coverage, consult your insurance agent. If you’re purchasing a new home and need mortgage information, contact your mortgage broker.