The Relationship Between Home Insurance, Appraised Tax Value and Mortgage Loan Amount

There are two questions I’m frequently asked, either by home owners or buyers as it relates to the insured value of their home. The first question is about the appraised value of a home as listed in the county appraisal district and the second is about the purchase price and/or loan amount of their home. In both cases, the question is what is the relationship between the amount of insurance they have on their home and either the tax or loan value of their home? Let’s look at all three and contrast them.

Home Insurance Value: The amount a home is insured for should be the replacement cost value of the home. Replacement cost simply means if the home were destroyed, how much coverage is needed to rebuild your home as it is now. The amount of coverage should be enough to cover demotion of the home, removing the debris and hauling it off to the dump, and rebuilding the home on a single home basis.

Demolition of a home can cost from $4 to $10 a square foot while debris removal will be based on a cost per ton and varies widely depending on the municipality governing the dump site. In north Texas, dumps charge anywhere from $10 to $50 per ton. Rebuilding cost currently range from $100 to $200 or more per square foot depending on the finish out of a home and that may not include the cost of architectural plans, grading, EPA skirting to prevent erosion from ending up in the drain, permits, inspection fees, delivery charges, or even the Port-o-potty the builders will use.

Tax Appraisal Value: The value a Texas county tax appraisal district assesses on a home is based on what they believe is the “market” value. In other words, what the tax district believes a home could be sold for on the open market within a reasonable time. Based on market conditions in north Texas over the past several years, the amount listed may not reflect current market conditions nor be enough to rebuild the home in the event of a total loss. In other cases, the information may be incorrect and not include updates to the home or recent remodeling projects.

If you disagree with the appraised value of your home, Texas homeowners have until May 15 to submit their protest based on a new state law.

Sale Price / Mortgage Value: The purchase price of a home in a rising market, like we’ve had in north Texas since 2012, includes both the home and the lot beneath the home. The sale price may have a premium over the asking price in the event of multiple bidders. In cases where the market values have dropped, the sale price may be below the cost to replace the home. In either case, the measurement is based on the market demand, availability of homes, and conditions that have nothing to do with replacement cost.

If we base the amount of coverage on the loan value, then the amount of the down payment will have an impact on the insured value. In some instances, the lot value may rival the cost of the home or exceed it. In such cases, location has more to do with the sale price than anything. This too may not accurately reflect the actual cost to rebuild or replace the home.

All these values have their place, but only one accurately reflects what it cost to rebuild or replace your home. And that’s providing the quote you received, if it wasn’t from us, considered the number and grade of bathrooms, kitchen grade, floor coverings, roof shape, number of stories, etc. If it didn’t, then the amount of coverage quoted may not be an accurate replacement estimate. What do you think? Share your comments, questions, and experiences with me on my Facebook, Google +, and LinkedIn pages. I’d love to hear from you!

Evie Wise
Evie Wise


Evie Wise
Evie Wise

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