Mortgage Lender Myths:  Why Am I Insured for More Than My Home’s Value?

Mortgage Lender Myths:  Why Am I Insured for More Than My Home’s Value?

February 06, 2023

I am asked this question often. Why am I insured for more than my home’s value? I want to reduce my dwelling coverage. First you must understand that there is a clear difference in a dwelling’s replacement cost and market value. 

What is Replacement Cost? 

Replacement cost is the cost to rebuild or replace a dwelling with a similar structure, considering current construction costs, labor rates and other expenses. It also considers costs of building materials, supply and demand, and contractor availability. 

What is Market Value? 

Market value is the estimated amount for which an asset or liability should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently, and without compulsion. 

Replacement Cost vs. Market Value? 

In simple terms, replacement cost is what it would cost to replace or rebuild the property, while market value is what the property is worth on the market based on supply and demand. The two can be different if market conditions change or if the cost of construction changes. 

These two figures are often vastly different numbers. Mortgage lenders often cause confusion because their requirements for coverage are based on the market value and/or loan amount, not the replacement or rebuilding cost.  

Your insurance contract requires you to insure your home for its replacement or rebuilding cost. It is recommended you review your dwelling coverage annually and make changes if necessary to ensure it accurately reflects the current replacement value. Some examples of home renovations that would require increasing dwelling coverage include: 

  • Adding an addition to the home 
  • Updating electrical or plumbing systems 
  • Installing a new roof or siding 
  • Converting a garage into living space 
  • Installing a swimming pool 
  • Finishing a basement 
  • Upgrading a kitchen or bathroom 
  • Adding a deck or patio 

It is important to inform your insurance provider about any significant renovations you make to your home, as this can affect your dwelling’s replacement cost. 

When Market Value Exceeds Replacement Cost 

In some instances, a dwelling's market value can exceed its replacement cost due to several factors, such as: 

  • Location: A desirable location, such as a desirable neighborhood, can increase the market value of a dwelling. 
  • Scarcity: Limited supply of similar properties in a desirable area can drive up prices. 
  • Economic growth: Economic growth in a particular area can drive up demand for housing, resulting in higher market values. 
  • Amenities: Properties with unique features, such as a pool, a large lot, or a great view, can command a premium price. 
  • Renovations and upgrades: Significant upgrades or renovations to a property can increase its market value if they are desirable to potential buyers.  
  • Historical value: Properties with historical significance or unique architecture can be valued higher by buyers who place a premium on these attributes. 
  • Market conditions: General market conditions, such as low interest rates, strong job growth, and increasing population, can also drive-up housing prices and increase the market value of a dwelling. 


Insuring your dwelling adequately important because it protects one of your most valuable assets from potential risks such as fire, theft, natural disasters, and other unexpected events that can cause significant financial loss. In the event of a covered loss, having adequate insurance helps ensure that you will be able to rebuild or repair your home, without having to bear the full cost out of pocket. 

If you would like me to review your dwelling coverage and homeowner insurance, please contact me today!