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Ask the Home Insurance Expert

The appraised value of my townhome decreased. Shouldn't my home insurance rate also decrease?

Your insurance rate isn't tied to the market value of your townhome. Insurers consider the cost of rebuilding a structure when determining the amount of necessary coverage. Construction costs don't necessarily go down when the housing market slumps, and may be higher or lower than the market value of a home.

You didn't specify what type of home insurance policy you have. Many townhome owners have an HO-6 policy, which is specifically designed for condo, co-ops and townhome owners whose units are within larger structures and who share common areas with other owners in a complex. A portion of condo or townhome association fees go toward insurance to cover buildings and common areas. The HO-6 policy covers personal belongings and provides liability protection for the unit owner.

However, some townhomes do not have an association that provides insurance for buildings and common areas. In this case the townhome owner has a standard home insurance policy that treats the unit as a single-family home.

Regardless of what type of policy you have, a drop in the appraised value of your townhome would not necessarily affect the cost of rebuilding the unit, replacing your possessions or providing liability protection.

Homeowners insurance and credit history

Regarding your credit, you're correct in thinking insurance companies check credit history. They use that information to create a credit-based insurance score, which they consider along with other factors to predict the likelihood that you'll file a claim. But you needn't worry about such inquiries hurting your credit score.

A credit inquiry happens anytime a lender or other business checks your credit report. FICO, the creator of the FICO credit score, classifies credit inquiries as "hard" or "soft." Inquiries from lenders after you apply for credit are hard. Too many hard inquiries can signal that you're desperate for cash and hurt your score. (However, the FICO credit scoring model counts multiple inquiries in a two-week period as just one inquiry so you're not punished for rate shopping.)

Soft inquiries are those that are not a result of you applying for credit. They include inquiries by insurance companies, prospective landlords and employers, and lenders that want to send you prescreened credit applications. Only hard inquiries impact your credit score, FICO says, so shopping for insurance quotes shouldn't damage your credit.

For more, see the basics of condo and co-op insurance and how your credit history affects your home and car insurance rates.

Last updated: May. 4, 2011