(BPT) - As the housing market bounces back in many parts of the country, you may be wondering: What's my home worth now?
There's actually more than one answer, according to Scott Halliwell, a certified financial planner at USAA. He says your home has three potentially very different price tags based on its:
1. Market value
2. Replacement value
3. Property tax value
“Since different values can be used for different reasons, it's important to understand when each applies,” Halliwell says, adding that some of these values may move in different directions at the same time.
This is the amount homes in your area are bought and sold for. It's the measure most folks think of when they try to estimate their home's worth or value. Determined in part by the going rate for similar houses in your city and neighborhood, market value is not based on what you paid for the home or how much it cost you to finish out the basement, reroof or remodel the kitchen. Many intangibles factor into this figure.
Understanding the market value helps you calculate your total net worth and how much equity you have in your home. To calculate equity, subtract the amount you owe on your home from its market value: That's about how much profit you could receive from a sale.
To strengthen your negotiating position with potential buyers, get an accurate idea of your home's market value. A real estate agent can tell you the selling prices of similar homes in your area, helping you set reasonable expectations.
"If your area is in a buyer's market, your home's market value may be lower than you'd like. You might not have as much leverage against a buyer who wants to negotiate, so you need to know where you're starting," Halliwell says.
Even if you're planning to stay in your home, market value matters when taking out a home equity line of credit or home equity loan. For example, you may be planning a kitchen remodel and need $40,000, or you want to tap your equity to help pay your kids' college tuition. Depending on your creditworthiness, many lenders will allow you to borrow up to 85 percent of your home's value, less any mortgage or other equity loan on that property.
If your home is completely destroyed because of, say, a fire or natural disaster, replacement cost is what it would take to remove debris and rebuild the structure from the ground up based on construction costs in your area.
"Our philosophy, which is backed by years of experience, is that homes should be insured for 100 percent of the minimum estimated replacement cost," says Cedric Matterson, a senior staff underwriter with USAA. Unless your insurance covers replacement costs, he says, you run the risk of coming up short if the costs to rebuild your home are more than your coverage will pay.
As building costs go up, homeowners insurance can shield you from rising building costs.
"It's very possible to see local building costs increase while market values decline," Halliwell says. "This can lead to a situation where you actually need more dwelling coverage, despite seeing your home's value drop."
Property tax value
This is the number taxing authorities use to calculate your property tax bill. A given home may be taxed by more than one jurisdiction - hospital and school districts, for example - and each may apply its own math.
Typically, property tax values are meant to approximate the home’s market value, though sometimes there's a big discrepancy between the two because of outdated assessments or mistakes by assessors. An accurate property tax valuation ensures your tax bill isn’t too low or too high and helps to ensure that your entire tax burden is understood.
If the property tax value of your home exceeds the market value, consider contesting the value with your taxing authority. And be aware that certain actions on your part, such as remodeling, could cause a reassessment and result in a larger tax bill.