There are few scenarios in which homebuyers don't expect their home to increase in value over time. The nature of real estate is to trend upward, even if there are dips along the way. But it's important for homeowners to know what will happen when things don't go according to plan. An upside-down property refers to one in which you owe more than the home is technically worth. We'll look at how home insurance factors in and what you should do if you're in this situation.
Know the Costs to Rebuild
The most important thing about upside-down homes is what it would cost to rebuild. In other words, if your home is leveled by a tornado, do you know exactly how much it would cost to rebuild the entire structure from scratch? While it's unusual for homes to be demolished, it's not unusual for homeowners to need to make significant repairs due to serious damage. Unless you're planning to move, you'll need your home insurance to cover the costs — even if those costs exceed the property's assessment value.
Understand Replacement Terms
The replacement costs on your policy refer to how much it would cost to rebuild the home with similar materials in the case of destruction. The actual cash value refers to what you would get if you chose to sell the home at the time of the claim. Your benefits will depend on the plan you select. When you're choosing the amount of coverage you need on an upside-down property, you should be opting for an amount that comes close to the true replacement costs — as opposed to the market value of the property.
Stay On Top of Changes
It's not uncommon for homeowners to have underinsured homes. Some people willingly choose to forego coverage, but many simply aren't aware that they need to update their policies. If your block begins to lose value and your home insurance is based on the market value of your home and not the replacement costs, you could end up losing more than you realize in the case of serious damage.
Talking to a home insurance expert can be a great way to learn more about when to opt for the property's replacement value. And while it may be difficult to opt for the additional coverage, the benefits far outweigh the negatives if you need to file a major claim.