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How much is your house worth? It depends on the type of valuation. Homes are valued in a variety of ways for different reasons. The appraised value, assessed value, fair market price, replacement value and actual cash value are all determined differently.
Only two valuation methods affect your home insurance rates and coverage, but you will run into the others at some point.
While not all of these valuations affect your home insurance premiums directly, it’s still wise to be aware of any changes. The replacement cost and dwelling coverage are the two main values you need to review annually to ensure proper coverage. However, it’s also a good idea to keep an eye on assessments and other value changes.
Factors that go into home value include age, location, condition, size, building materials and the sale of comparable properties and homes in the area. Read on to find out how to see how much your home is worth and how these values affect your insurance.
Key takeaways
- Homes are valued in different ways, including appraised value, assessed value, fair market price, replacement value and actual cash value.
- Insurance companies consider location, building materials, condition, size, age and more to evaluate your home's value.
- A standard home insurance policy uses replacement cost to calculate the dwelling coverage for your policy.
IN THIS ARTICLE
- How is my home's value calculated?
- Appraised value
- Assessed value
- Fair market value
- Replacement value
- Actual cash value
- Which valuations are used for home insurance?
How is my home's value calculated?
There are five types of home valuations. Below we'll cover what organizations perform them, what they are use for and when you might need them.
Appraised value
Who usually performs it: An independent appraiser
When it’s used: Buying a home, getting a mortgage or a home equity line of credit
About appraised value: Mortgage lenders choose a professional appraiser to evaluate a property's value. The borrower typically pays for the appraisal.
Mortgage lenders use the appraisal to determine how much they are willing to lend a buyer for the property.
The appraised value is used both for new mortgages as well as other types of borrowing in which you may put the house down as collateral. A lender will use the appraisal to figure out the loan to value (LTV) ratio.
The LTV is typically kept below 80%. That means you are being loaned 80% or less of the home’s appraised value. A higher LTV may prevent borrowing or require the person to get mortgage insurance.
A low appraised value can also affect whether a homebuyer can take out a mortgage. In fact, you may find the appraised value of a home is much different from its market value. That difference can affect whether you get a mortgage.
Let's say you agreed to pay $400,000 for a home, but the appraisal says it's only worth $300,000. The lender may not grant a mortgage in that case unless you are able to provide enough of a down payment to reduce the loan to value ratio.
Assessed value
Who usually performs it: Local or county government, such as an assessor or tax collector
When it’s used:To calculate property taxes
About assessed value: Governments use assessed value to figure out what to charge you for property taxes. This is usually lower than the appraised value and market value. In other words, don't fret if you paid $500,000 for a home and the assessed value comes back $350,000. Look on the bright side -- a lower assessed value means you pay less in taxes than what your home is worth on the market.
The appraised value analyzes nearby home sales and values, improvements and new additions to your home, as well as its current condition.
The government will create an assessed value and then calculate your property taxes based on the community or county's property tax rate. Assessed value is especially important in states with no sales or income tax. These states can have higher property taxes than a similar state with an income or sales tax.
Fair market value
Who usually performs it: Licensed appraiser
When it’s used: Home insurance claims, home mortgage refinancing, eminent domain proceedings, short sale
About fair market value:Fair market value is what a property is worth on the market. In other words, what you could get if you sold the home right now.
Fair market value can increase or decrease after the purchase. For instance, maybe your community built a new high school. That likely increased your taxes, but it also probably increased the fair market value of your home. New schools bring new families, which can heat up a local housing market.
Fair market value calculations consider what similar nearby homes are currently selling for, and the state of the home and property as well as factors about the community.
Replacement value
Who usually performs it: Insurance company
When it's used:To calculate dwelling coverage on your home insurance
About replacement value: The replacement value is what it would cost to replace your home if it's destroyed. Home insurance policies with replacement value usually cost more than actual cash value. That's because the insurer is agreeing to pay the current amount to rebuild your home if you file a claim, which is likely higher than when it was originally built. Depreciation is not taken into account.
Figuring out the replacement value of your home can be challenging, but it's integral to your policy as it's tied to your dwelling coverage amount, and not having an accurate number can leave you underinsured. Read our guide onhow to calculate the replacement value of your house for more details.
Actual cash value
Who usually performs it: Insurance company
When it's used: To calculate depreciated value for a claim
About actual cash value: The actual cash value is the current value of your home allowing for depreciation.
An actual cash value policy is usually cheaper than replacement cost since the insurer is only agreeing to reimburse you for the depreciated value of the home and not what it would cost to replace it.
Depreciation considers the age of the home and the expected lifespan of the home. Actual cash value is calculated by taking the current replacement cost and subtracting depreciation to determine how much the insurance company would pay.
Actual cash value is unusual for a home insurance policy, but is used in some cases, usually with homes that are older or don’t need replacement cost eligibility requirements.
Which valuations are used for home insurance?
As you can see, home valuations can fluctuate depending on the situation. You'll likely come across different types of home valuations when you buy a home, refinance a mortgage or apply for a home equity line of credit.
However, for insurance purposes, replacement cost or actual cash value are the two types of home value calculations that are used.
In case you missed it
As a seasoned insurance expert with an extensive background in the field, I bring a wealth of knowledge and firsthand expertise to help you navigate the complexities of home insurance valuation. My commitment to providing accurate and unbiased information is evident in my track record of informed decision-making and empowerment of individuals seeking insurance guidance.
Let's delve into the concepts discussed in the article and shed light on each:
1. Appraised Value:
- Performed by: Independent appraiser.
- Usage: Buying a home, securing a mortgage, or obtaining a home equity line of credit.
- Importance: Lenders use it to determine loan-to-value ratio (LTV) and decide how much to lend for the property.
2. Assessed Value:
- Performed by: Local or county government, assessor, or tax collector.
- Usage: Calculating property taxes.
- Significance: Typically lower than appraised and market value, it influences the amount you pay in property taxes.
3. Fair Market Value:
- Performed by: Licensed appraiser.
- Usage: Home insurance claims, home mortgage refinancing, eminent domain proceedings, short sale.
- Role: Represents the current market worth of the property, considering factors like community changes and home condition.
4. Replacement Value:
- Performed by: Insurance company.
- Usage: Calculating dwelling coverage in home insurance.
- Crucial Aspect: The cost to replace your home if destroyed, often higher than the initial construction cost. It determines your dwelling coverage.
5. Actual Cash Value:
- Performed by: Insurance company.
- Usage: Calculating depreciated value for a claim.
- Explanation: Reflects the current value, accounting for depreciation. Usually cheaper than replacement cost in home insurance.
How Home's Value is Calculated:
- Factors Considered: Age, location, condition, size, building materials, and recent comparable property sales.
- Key Takeaway: Insurance companies evaluate these factors to determine the property's value.
Valuations in Home Insurance:
- Main Calculations: Replacement cost and actual cash value are crucial for insurance purposes.
- Annual Review: Regularly assess these values to ensure proper coverage, with a focus on changes in assessments and other factors.
By understanding these valuation methods, homeowners can make informed decisions about their insurance coverage. Trust in Insurance.com's commitment to providing accurate and unbiased information reviewed by experts, ensuring you have the knowledge to make confident insurance decisions.
