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In addition to the hazard insurance requirements of the commitment herein, NVR Mortgage Finance, Inc. shall require a hazard fire insurance policy for the following coverage:

1) Guaranteed cost of replacement policy for an amount of coverage as determined by the insurance company, OR

2) Dwelling coverage in an amount equal to the amount of the mortgage, if said amount equals or exceeds 80% of the cost of replacement of the improvements on the subject premises as are indicated on the appraisal, OR

3) 100% of the cost replacement of the improvements on the subject premises as set forth in the appraisal. The cost of replacement of the improvements as set forth in the appraisal is $113,800.

I always prefer option 1 because if the house burns to the ground, I am insured to have it replaced at its current value and not whatever I happened to pay for it however many years ago. With replacement value, your insurance is recalculated every year with assumptions on its appreciation, so your coverage essentially stays current. If you only insure for the purchase price, and the market goes wild and you have some sort of disaster, you would get left holding the bag for the difference between what the insurance would cover and what it would actually cost you to replace the structure.

Although the mortgage company requires insurance to protect their interests, you really buy insurance to protect your interests with them being covered almost as gravy. I always shop for my homeowner's policy with my needs in mind. If I cover that, I've also covered the bank.
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