2. Market value vs. rebuilding cost
Inga says most homeowners mistakenly think it's enough to cover their house for what they paid for it—the market value. That's how much the house is worth to a buyer in its current condition. A house's market value is affected by many factors that aren't related to the cost of rebuilding the home itself, such as the quality of nearby schools and whether there are many or few other homes on the market.
Instead, Inga says, homeowners should cover their home's rebuilding cost—what it would cost to rebuild their house today. An estimated rebuilding cost will take into account things like:
- The square footage of your house
- When the house was built
- The kinds of floors you have
- Any custom or designer kitchen and bathroom upgrades
- The cost of labor in your neighborhood
Rebuilding cost can be similar to market value, but it can also be substantially more or less. Homeowners should determine their rebuilding cost before purchasing insurance, and can ask their insurance agent for a suggestion on how to make that determination.