2 Steps to Understanding Property Insurance Coverage

Understanding property insurance coverage is important for every homeowner. There are at least 2 steps to understanding property insurance coverage and how it affects you as a homeowner. These steps to understanding can help you determine the necessity of the coverage you have and what is required in order to protect yourself against loss.

Determining the Amount of Coverage

The first step to understanding property insurance is knowing how the amount of coverage is determined. For any homeowner, the amount of property insurance coverage that is carried is based on a lender’s need for assurances against loss. If, for example, you purchase a home for $500,000 and put $100,000, you have a mortgage balance of $400,000. The lender is going to deem that you have a need for $400,000 in property insurance since that is the amount of liability that you have. If the home were damaged or destroyed, the property insurance policy will provide the lender with the cost of the loss relative to their risk.

Mortgage Balance versus Equity

As you pay your mortgage off, it is important to understand that you should review your coverage periodically to make sure that the amount coverage matches your liability and the value of your home.  As your loan balance decreases, the amount of unmet liability to the lender is reduced.  Conversely, the amount of equity or value to you as a homeowner is increasing. Your property insurance should reflect this change in your home’s value.