Question

Why might a mortgage lender require you to have home insurance? What is the difference between actual cash value and replacement value? Which one is more valuable?

Answer 1

Lender requires one to have home insurance as it safeguards the value of the asset, in case there is a loss/damage due to accidental causes.

“replacement cost” is defined as the cost to replace the property on the same premises with other property of comparable material and quality used for the same purpose.
“actual cash value” is can mean “fair market value,” which is the amount a buyer would pay a seller if neither were under undue time constraints. Insurance industry’s traditional definition: the cost to replace with new property of like kind and quality, less depreciation.

When calculating items at actual cash value, the insurance company can charge a lower premium. This is the same idea as increasing your deductible to reduce your insurance costs, except that in this case, your “deductible” is the difference between the depreciated value and the cost of replacing the item. Therefore from a homeowner's perspective, the actual cash value is a better option as it leads to lower premium.