Can a Home Be Insured for Less Than the Mortgage Balance?

In a one-word answer to the question: yes.

However, the reasons a home’s insured value can differ from the mortgage balance for even the market value are a bit more complex.

Your home's market value is based on dozens or even hundreds of factors. But even your home's market value can differ from the mortgage balance.

You may have made a down payment, which reduces your mortgage balance relative to the purchase price. And, of course, price fluctuations are commonly based on supply and demand or other factors.

Your home’s insured value tracks the rebuild cost

Ideally, your home's insured value matches the cost of rebuilding your home. Immediately, you can see why the mortgage balance and your home's insured value may not match.

For example, if you purchase a single-family home, the purchase price includes both the house and the land. But land, for insurance purposes, is indestructible, although your policy may cover some costs involving damage to landscaping.

Imagine that you purchased a home for $500,000. Perhaps $100,000 of the purchase price is for the land beneath your home. The home itself is only 80% of the purchase price. But even this amount can vary from the insured value of your home.

When determining an insured value for your home, you work with your broker to determine your home’s size, features, and build quality. Today’s insurers use sophisticated software to calculate your home’s rebuild cost, considering the price of materials and cost of labor in your area.

Insurance protects your actual loss

Because markets fluctuate and each household may be at a different stage of repaying the mortgage loan, a mortgage amount higher or lower than your home's rebuild value is common. You might owe $350,000 on the mortgage with your home insured for $300,000. The reverse can also be true, with an insured value higher than the mortgage balance.

Ultimately, your home insurance policy protects your actual loss, meaning your policy cannot pay you more than the cost of rebuilding your home. Instead, your policy can make you whole if you have a covered claim.

In most cases, this structure still meets the needs of your mortgage lender. Your home acts as security for the mortgage loan and the insurer will pay to repair or rebuild your home if you have a covered loss.

Review your coverage with an insurance professional. While your home’s insured value tracks the cost of rebuilding, rebuild costs can change over time, possibly leaving you underinsured. Also, many households make changes to their home, putting on additions or upgrading kitchens or bathrooms, for example. These changes can affect the cost of rebuilding, so it is important to discuss upgrades to your home with an insurance professional to be certain you are fully insured.

Have any questions? We can help.

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