Do you own the home free and clear?Any settlement will be made to you and the mortgage lienholder if you still owe money on your home. If the settlement is large enough to pay off the mortgage, then that portion goes to the lender and you keep the remainder for a down payment on another house. "If the settlement is not enough to pay off the mortgage, then buying another property is probably off the table," Raab says.
What does your insurance policy say?Most home insurance policies provide replacement cost coverage for the dwelling. In fact, a mortgage lender typically will require the homeowner to have replacement cost coverage, says Ronald Reitz, president of the National Association of Public Insurance Adjusters and president of San Diego-based Quality Claims Management Corp.
But there are some policies that provide coverage for actual cash value of the home (not including the lot). This might be the case for an older, run-down home, where the cost to rebuild would far exceed the value of the home, putting replacement cost coverage out of reach. In California, actual cash value for a dwelling is the same as fair market value, unless it's defined otherwise in the policy, Reitz says.But in states other than California, even replacement cost policies can include limitations on the settlement if you decide to buy another home instead of rebuild. "Know exactly how your policy treats a total loss. When push comes to shove, the language in the policy is what matters," Raab says. "It's a contract."
How much would it cost to rebuild?After a disaster, the insurance company doesn't just write you a check for the amount of your dwelling coverage and send you on your way. If you have a replacement cost policy, you and the insurance company reach an agreement on how much it will cost to rebuild, and then the insurance company will release the money in portions. Typically the insurer will provide the actual cash value and then release the remainder once you've actually replaced the home, whether you rebuild or buy, Reitz says. Even if you plan to buy, you and the insurance company must settle on a figure for how much it will cost to rebuild to get the full replacement cost amount. United Policyholders recommends you get independent estimates on the scope of the loss and the cost of rebuilding to replace the house. Then use that information to negotiate with the insurer for how much money you can use to buy a replacement home. "You have to present compelling evidence of what it would cost," Bach says. In California, "he who negotiates well can generally buy instead of rebuild if you have a replacement cost policy."
That means you'll need to hire some help, such as a public insurance adjuster. Contractors aren't going to want to put the time into estimates for a theoretical job they'll never get.Essentially you have to recreate on paper the house to figure out what you're entitled to, Reitz says. "That's quite a process to figure out. . . . It's hard for people to navigate on their own."