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How do I value my property before applying for Home Insurance?

It is natural for homeowners to value their property and calculate its worth. Generally, most people get their home valued only when applying for home insurance and some others only when they need to sell it. However, the value of your home changes based on the type of valuation and the reason for which it is valued. They vary depending on the appraiser and can have a direct or indirect influence on the home insurance rates and coverage. There are five different types of valuation - appraised value, assessed value, fair market price, replacement value, and actual cash value.

Not all of these valuations are required for home insurance.

There are many factors that are taken into consideration for the valuation of a house - location, age, building materials, condition, size, and neighbourhood property values and home sales. For example, if the properties in your neighbourhood have been sold for a higher price than its actual price, this might increase your home’s value.

Read further to know more about the various types of valuations, the appraiser who conducts and when you will actually need them.

Fair Market Price

A Fair Market Price is what a property is actually worth and the market value of the property when put for a sale. It is usually appraised by a licensed appraiser and this value will help during a Home insurance claim, home loan refinancing, property tax assessments, and short sale. It is the price a prospective buyer would be willing to spend for the intended purchase.

A fair market price is not written in stone, therefore is dynamic and keeps changing after the purchase due to various reasons. It could be due to a new school or college being built, which could bring in a lot of new families, making it an ideal housing market. Though this might increase your taxes, it will actually increase the fair market value of your home.

To appraise the fair market value of your property, it is important to understand the previously purchased value of the property, purchase value of similar homes in your neighbourhood and the condition of your property.

Replacement Value

A replacement value is different from the fair market price for it refers to the cost required to replace your property and its contents if the property is damaged due to any unfortunate circumstances, while a fair market price is for how much the property would be sold in its current state. Replacement value is one of the most important types of valuation for home insurance. This type of valuation is performed by an insurance provider and is useful when applying for home insurance.

Generally, home insurance policies with replacement value cost more than actual cash value. This is because your insurance provider will offer you money to help you replace your home and contents with similar commodities and the depreciation is not taken into account.

Assessing the replacement value of your home can be quite difficult, but it is equally important because your entire insurance policy is dependent on this. Take time to appraise the replacement value correctly, so as to save yourself from being underinsured or over insured. 

Actual Cash Value

The Actual Cash Value refers to the cost to replace your home in its current condition. In other terms, it is the cost required to replace the depreciated version of your house and not the value of the house if it was new.

Similar to replacement value, the actual value is appraised by an insurance company and it is useful only when applying for home insurance. Usually, the actual cash value is cheaper than the replacement value because the insurance provider will agree to only reimburse you for what your home is worth and not what it would cost to replace it.

Unlike replacement value, actual cash value takes depreciation into account. So, the age of the home and possible lifespan will be considered. For instance, insurance providers generally would expect their homeowners to change the roofs every once in a while. If the roof of your house crosses over a stipulated period, the actual cash value of the structure will be lower, which the replacement value doesn't take into account.

As you can see, the value of a home is dynamic and keeps changing. So, it is safe to appraise the value of your home by a licensed appraiser to know its worth and to have an idea of your line of credit, which could come in handy at any point of time.

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