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My house is worth less now than what I paid, should I lower my homeowners insurance coverage to match the home's current market value?

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1 Answer

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It really depends. Home values fluctuate over time, and current home prices are lower than they have been in decades. However, the current home market is a temporary occurrence, and lowering your homeowners insurance policy could easily leave you out in the cold when those prices rebound. Nevertheless, if you're able to change your policy as your home's value increases, then lowering your coverage amounts to match the actual replacement cost of your home makes sense and can save you money. The final determinant should be your home's replacement cost.

If your home, as an example, is currently valued at $100,000, but the cost to cost to replace your home is $150,000, then your goal is to insure the home for that replacement value. Otherwise, in the worst case scenario and your entire home is destroyed, you wouldn't have enough insurance coverage to rebuild your home. You also shouldn't just assume that rebuilding costs go down in line with home prices. You should conduct a thorough check with contractors and other professionals to see what the actual costs would be.

Reducing your home insurance could possibly hurt you in the long run. After all, the value of your home may have decreased, but the materials it is built from have not, and those materials will continue to go up in value over time, not down. Because of that, it is important to have full replacement coverage insurance on your home, and that your insurance policy is based on that amount, not a fluctuation in the current market. It might not be cheaper to rebuild your home and new building codes could make costs greater than you think.

Another part to consider is the costs associated with your mortgage. You owe the mortgage company the purchase price of the home, plus financing charges. Even though the value of the home may have gone down in recent years, the value of your mortgage has not changed. Reducing your insurance, for that reason, could only undermine the purpose of having insurance: to repair or replace the home in case it is damaged by a covered peril. The best advice that can be given is to conduct a thorough analysis of the situation and to speak with an experienced homeowners insurance agent. They can provide you with homeowners insurance quotes and work with you to determine the right amount of coverage to have on your home.

answered Apr 9, 2012 by anonymous
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