Replacement Value vs Market Value — This is often something people don’t understand when it comes to homeowner’s insurance. When a home is purchased, the mortgage company will require that the house carry insurance. In some cases, they will require that the insurance cover more than the purchase price of the dwelling. This is where replacement value and market value come into play. Replacement value is the cost incurred to rebuild the structure if completely destroyed. Market value is the amount you paid, or the approximate value of the home in a certain area.
For example, a home purchased in a rural area, may have a market value of $120,000. The exact house, located in a different area, may have a market value of $285,000 due to the value of the underlying land; however, the cost to rebuild the house after a loss would be the same in either location. An insurance company is looking to insure the home for the full replacement value, not the current market value. You must remember that if your home is destroyed, the insurance company will pay to rebuild your home in its current location, not buy one down the street for you to live in.
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