How much homeowners insurance coverage will I need to close the new mortgage?
Lenders often recommend or require a “guaranteed-replacement-cost” policy. This type of policy will generally pay out 20-50% more than the face value of your policy. If there is severe damage – from a fire, for example – you can use this money to have your home rebuilt. A replacement-cost policy will usually adjust each year to the rising costs of construction in your area. Unfortunately, even guaranteed-replacement-cost polices do not always cover these new construction expenses. For this reason, some insurers may go even further to offer an “endorsement” that will pay for the upgrading cost. It’s a good idea to consider an endorsement on your replacement-cost policy.
A safe bet is to buy a guaranteed-replacement-cost policy that will generally pay out 20-50% more than the face value of the policy to rebuild your home (this is also the preferred policy of lenders). A replacement-cost policy typically adjusts the amount of insurance each year to keep pace with rising construction costs in your area. It is important to note that local building codes require structures to be built to specific standards which could vary over time, if your home is severely damaged, you may be required to rebuild it to current codes. Even guaranteed-replacement-cost polices do not always cover this expense. However, many insurers offer an endorsement that will pay for the upgrading cost, it is a good idea to consider adding such an endorsement to your replacement-cost policy.
