Ok, so you got a letter from your mortgage company indicating your insurance agent doesn’t know what they’re doing and your home is underinsured. In reality, your mortgage company should stick to lending money on homes and cease from the “sky is falling” mailings. Here’s what the letter probably means and why you’re receiving it.
Why am I getting this letter
Many mortgage companies have a flag set in their system that is triggered when the insurance coverage on a home is less than the loan amount. To the average person, this makes total sense. If your home burns to the ground and there isn’t enough insurance to cover what you owe on the home, there’s a problem, right? Wrong. Insurance isn’t now and never was intended to cover your loan. Let me break it down for you.
Difference between valuations
There are 2 different valuations that we need to distinguish between. The first is Fair Market Value. This is probably the amount you paid for your home and, for a lot of people, very close to what you owe on it. It is comprised of the location, lot size, size of the home, housing market, etc., but basically, it’s what your home would sell for today. The second valuation we need to discuss is Cost To Rebuild. The Cost To Rebuild is based on the cost of materials in your area, the cost of labor, the size of your home (or materials required to rebuild), the amount of levels in your home, etc. Simply put, it’s the cost to rebuild your home. It does NOT include the land, the view, etc. Your mortgage company is trying to tell you that you need enough insurance coverage to pay for your loan, but as we just showed, Fair Market Value does not equal Cost To Rebuild.
What does it mean
So, what are the ramifications of receiving the letter and what are your obligations. More than likely, there is no action needed on your part. Usually you can just throw the letter in the trash. Your mortgage company can’t force you to carry more coverage than necessary (Cost To Rebuild). But, it’s always prudent to let your agent know about it and make sure they call your mortgage company and double check that everything is OK. The only time I’ve seen an insurance company have to increase the dwelling coverage in this situation is when the cost to rebuild the home was truly less than what was needed.
If you have any questions on the cost to rebuild your home and would like to ask an expert, give us a call at 1-800-665-5154.