Homeowner's Insurance? - Posted by Earl

Posted by Soapymac on November 14, 1998 at 20:37:25:

print out all the messages and read them in the order they were presented. I will re-affirm what one of them said, with some emphasis.

Your mortgage is for the COMBINATION VALUE of both the HOUSE and the LAND. Your homeowners insurance covers THE HOUSE ONLY. Because of that, and because market value of both the house and land helped determined your mortgage,THERE IS NO – I REPEAT,-- NO relationship between the market value of both the home and the land AND the replacement cost of the home alone.

You are making an erroneous connection between the insurance and the market value. Most people make that mistake. All the insurance does IS PROVIDE YOU WITH A POOL OF MONEY to replace the home if it burns. No more, and no less.



Homeowner’s Insurance? - Posted by Earl

Posted by Earl on November 11, 1998 at 18:08:23:

I am in the process of re-newing my Insurance on my home. I have read in “Wealth Without Risk” and at the Money.com site that I only need to insure my home up to 80% of its replacement cost in order to be reimbursed for its full replacement cost if my home suffers a loss.

My current insurer told me that I had to get at least enough insurance to equal my loan balance, but the replace ment cost of my 2 yr. old home is about 85K, so 80% of that is 68K and my loan balance is about 94K. My mortgage company said, that as long I have full replacement cost insurance at 80% or more, then there would be no problem.

I just wanted to know if others have had similar issues with their Homeowner’s insurance and would I be taking a risk by just insuring my home at 80% of its replacement cost, although it is 26K below the loan balance. Is the lower premium worth it and am I overinsuring if I keep it at the loan balance? Are the insurers reluctant to inform their customers about this because it would lower their premiums?

Thanks, Earl

Re: Homeowner’s Insurance? - Posted by Doris VA

Posted by Doris VA on November 14, 1998 at 21:45:13:

I’m no expert on homeowner’s insur. but doesn’t it cover not just destruction by fire but also owner’s liability for accidents like a fall on the front steps by a visitor. Also storm damages etc. - damage caused by a leaky water heater and burst pipes etc. and maybe a number of other coverages too. Wouldn’t this have to be figured into the risk charges by the insur. company and be a premium cost in addition to the amount they determine for fire damage replacement costs?? Just a thought. Doris

Your making a BHM… - Posted by Soapymac

Posted by Soapymac on November 12, 1998 at 08:06:56:

thinking this way!


Now that I got that off my chest, let me share with you the purpose of Homeowners insurance.

Homeowners insurance is simply used to make the home “whole” again in case of a conflagration that results in damage to the biggest purchase you’ll ever make.

Properly designed, the policy will provide the necessary replacement monies to rebuild the home. The REPLACEMENT COST VALUE of the home, as far as insurance is concerned, HAS ABSOLUTELY NO CONNECTION to the sale price of the home or the mortgage carried on it.

The insurance is to provide money to rebuild the home (replacement cost). Where does the 80% figure come in? Generally, as long as the insured value of the home is within 80% of the replacement value, your insurance company will not give you a hassle with the cost of rebuilding your home.

If your home is insured for LESS THAN 80% of the replacement value, they will only cover up to that percentage of the replacement costs.

Example: Your home is FMV’d at $160,000 and breaks down like this:

Land ----------> $60,000
Improvements—>$100,000 (this is the home itself.)

You have a fire that results in a total loss of the home. The question is, what is the replacement cost to make the home “whole” again?

Insurance agents use a replacement cost estimator from the insurance company. If the estimator says it will take $125,000 in labor and materials, then…

your 80% insurance figure is $ 100,000

But what if you only have $87,500 of insurance? That amount is only 70% OF THE REPLACEMENT COST. Therefore, the insurance company is only obligated to pay up to $87,500. YOU HAVE TO COME UP WITH THE REST. And the beat of the mortgage goes on…and on…and on.

That’s right…even if you had a fire, your mortgage will STILL BE DUE each and every month. The bank is listed as an additional insured to protect THEIR ASSET…YOUR HOME.

You see where this is leading. You can’t come up with the rest of the money, so you split. Now the bank is on the hook for the rest of the money to make the house “whole” so after they foreclose, they can rebuild, resell, and recoup.

That’s why the bank told you the 80% figure…to protect THEM…NOT YOU.

Re: Homeowner’s Insurance? - Posted by JohnBoy

Posted by JohnBoy on November 11, 1998 at 19:15:52:

How much could you actually save a year to offset the risks? My homeowners insurance runs me $279 a year to fully insure a $165k home. It comes with $500k liability also. How much could I possibly save off that amount to justify cutting any corners on that? My opinion would be to fully insure yourself. Homeowners insurance is pretty cheap as it is considering the coverage your getting.

Re: Homeowner’s Insurance? - Posted by Randy -IL-

Posted by Randy -IL- on November 11, 1998 at 18:59:56:

I’m not an insurance agent or even an expert for that matter, but I do know a couple of things. Under no circumstances would I want to overpay my fair share of premiums. Nor would I want to underinsure my properties. Insurance is supposed to be designed to ease your troubles and make things go smoother when something bad happens to your property.

Your insurance company will only pay out up to the limits of your coverage. Even that depends on the severity of the destruction of the structure. Any insurance agent will or should tell you that land is not easily destroyed and that replacement payments for “land destruction” don’t happen very often.

I think you would be taking a big risk to not insure for the full amount owed to the bank. After all, wouldn’t it be silly to have a remaining 20% balance on your loan even after the structure is completely gone? or that nuclear waste had been spilled on your site?

I guess that if your lot is worth over 20% of your mortgage amount AND you could quickly sell or refinance the lot for 100% of value you would, in reality, have 100% coverage. Even then you may just break even on the deal. This scenario is just too close for me to have any part of it. To cut corners with insurance coverage is not appropriate in my book.

Just an opinion from a regular guy,


Re: Your making a BHM… - Posted by Earl

Posted by Earl on November 12, 1998 at 10:26:16:

I was not equating the value of my home to the mortgage amount. My current insurance agent stated that the mortgage lender would not let me insure my home for less than the current loan balance of $94K, although the replacemt cost is only $85K according to the insurance agent. So if my home was destroyed, I would just receive $85K and I would still owe the bank $9K, if I insured it at $85K.

Not quite… - Posted by Soapymac

Posted by Soapymac on November 12, 1998 at 11:57:18:


If I understand your post correctly, you would not receive anything.

Should you desire to rebuild, the money would be disbursed by the insurance company to the various contractors.

If you did not rebuild, the money would go to the bank and you would still owe the bank the $9K. It’s sorta like being “upside down” in an automobile finance…you owe more than the car is worth and if the car is a total loss, then you still owe the bank the difference.

BTW, talk with your insurance agent and make sure you have a guaranteed replacement cost rider on your policy. Forgot to mention that in my above post because I didn’t want to clutter the issue.

I understand what your lender is asking for with regard to insuring it for $94K. They are using insurance to guarantee themselves that THEY do not get into an “upside down” situation. Is it ethical? Maybe…maybe not. Is it done? Every day of the week. Somebody is winking at somebody.


Re: Not quite… - Posted by Earl

Posted by Earl on November 12, 1998 at 12:46:56:

What would recommend in my situation? Would it make financial sense to insure my home for less than mortgage balance because at the current level I am over-insuring my home, right?

Re: Not quite… - Posted by Dave T

Posted by Dave T on November 12, 1998 at 18:50:18:

In my humble opion, you should insure your home for the insurance estimator’s opion of its replacement cost and purchase the replacement cost rider with your policy. The insurance company will adjust the insurance limits each year at renewal to allow for increases in cost of living and inflation. Don’t forget that your mortgage also included the land the home rests upon. You do not have to insure the value of the land, only the replacements cost of the improvements on the land.

That is, if your appraissl is for 100K, and the land is 25K while the home is 75K, then you only need homeowners insurance for 75K to satisfy the bank. If they argue, remind them that the land does not get destroyed if the house burns to the ground. They will most likely ignore the question entirely, if you just purchase full replacement cost coverage for the home based upon the insurance estimator’s opinion and if that limit of coverage is at least as large as the appraised value of the home without including the land.

Re: Not quite… - Posted by Earl

Posted by Earl on November 12, 1998 at 20:01:54:

What about the fact that my mortgage balance is $94K, which is $9K more than the replacement cost of the home?