What does ‘replacement cost’ mean in hazard insurance?
I want to get a mortgage to buy a house. The lender requires hazard insurance at ‘replacement cost’ basis. I understand the lenders interest in recovering the mortgage, in case of total loss, and I understand there that home prices include the value of both the land, which cannot be lost, and the structure, which can be lost. BUT the home and neighborhood I’m interested in is old. I suspect the cost to rebuild that house, given the cost of labor, regs, etc., is more than the asking price. In that context, does ‘replacement cost’ mean I have to cover the cost to literally build a new home, assuming it is more than the value of the mortgage? For the sake of argument, lets assume that, in the event of total loss, I would want to simply payoff the debt, recover my money put towards the principal, and simply sell the land. Also, lets assume I don’t care to recover cost of the possession because the are cheap and/or valueless to me.
If the mortgage is for $ 100k, and the market value of the home is $ 150k, and the cost to build a replacement home, on the same lot, is $ 200k (for whatever reason), what is the coverage level with the bank require of me? And lets say I cover up to $ 300k, for what amount would would the insurance company reimburse me?
By market value, I mean the cost of the improvements (i.e. structure) not including the land. And by replacement home, I mean exact an duplicate of the destroyed structure. Lets say that this is a historic district with strict building and demolition codes, making new construction much more expensive than buying an existing home.