The Secret to Figuring Out How Much Your Home Is Worth

When I write homeowners insurance policies, many clients bring a copy of their bank’s appraisal of their home, but I use a very different number when I design their coverage. What gives? When it comes to your home, you probably underestimate its value because there’s a difference between a bank’s appraisal and insurance appraisal.

Bank Appraisal

Bank appraisals reflect what the bank needs to underwrite your mortgage. This type of appraisal considers how much the house is worth in today’s market, so it changes depending on current market conditions and how much similar homes have sold for in the area. While this is accurate for your bank’s purposes, it is not accurate when you consider insuring the most valuable thing you’ll probably ever own.

Insurance Appraisal

If you’re like most homeowners, if your house burned to the ground, you expect to have enough coverage to replace that house: tear down the charred remains, remove the debris, and build a comparable home. That cost will be higher than your original mortgage. New construction means hiring architects, engineers, contractors, and paying for permits, inspections, and materials. For an accurate appraisal, your insurance agent should ask you detailed questions about the construction and materials used in your house. They should require the recommended insurance company perform an onsite inspection—though, in most cases, the inspector does not have to go inside.

If you have a high-value home (with a replacement cost over $500,000) you expect the inspector to come into your house to ensure they document and photograph the construction of your house from the inside and the outside. This will make sure your coverage matches your house.