Your homeowners insurance dwelling coverage limit should be equal to your home’s replacement cost estimate, which is the amount it would cost to rebuild your home after a disaster.
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byFabio Faschi, PLCS, SBCS, CLCS
Fabio Faschi, PLCS, SBCS, CLCS
Property & Casualty Insurance Expert
Updated October 29, 2021|4 min read
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Your homeowners insurance policy’s dwelling coverage limit should be based on the replacement cost of your home, meaning the cost to rebuild it, not its market value or your remaining mortgage balance. Your replacement cost estimate is based on factors like your home’s square footage, number of bathrooms, and local building costs per square foot.
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While no replacement cost estimate is exact, there are certain methods of calculating it that are more accurate than others. In this guide, we’ll explain what replacement cost is and explore different options for determining your home’s rebuild value.
How to estimate your home’s replacement cost
Use the insurance company’s estimate
Hire a licensed appraiser or contractor
Use an online replacement cost calculator
Try a DIY replacement cost estimate
In homeowners insurance, replacement cost value is the amount it would cost to rebuild your home using similar materials in the event your house is damaged or destroyed. Replacement cost factors in local construction costs, labor costs, debris removal costs, and the square footage of your home.
In the event you file a roof damage claim after a storm, for instance, your insurance company will determine your claim payout by calculating how much it would cost to replace the damaged roof with one of similar type and quality. That means if your damaged roof is made of solar shingles, your insurer should reimburse you for the value of new ones rather than asphalt or a different kind of roofing material.
In order to receive a full replacement cost payout on a claim, your insurer will require that your house be insured for at least 80% of its true replacement cost value. This is known in the insurance world as the “80% rule”. If your home is insured below 80% of its actual rebuild cost, your insurer may only reimburse you for its actual cash value.
There are a few different ways to get a replacement cost estimate for your homeowners insurance policy.
When you get a quote from a homeowners insurance company, the initial dwelling coverage recommendation is based on the insurer’s replacement cost estimate. Insurance companies use their own replacement cost estimate tools to calculate your home’s replacement cost value. The value is calculated based on details provided in your insurance application and property data obtained from third-party companies.
Hire a local contractor or appraiser who is qualified in replacement cost estimates. They will likely conduct an inspection of both the inside and outside of your home and take note of everything that would go into a full rebuild. This will likely provide the most accurate replacement cost estimate, but it’s also the most expensive option.
There are several replacement cost calculators available online which can offer more comprehensive rebuild estimates of your home. These tools take the same factors into consideration that an insurance company does when calculating your replacement cost estimate, such as the square footage, age of your home, and its roof and foundation type.
For a rough estimate of your dwelling coverage amount, you can simply multiply the square footage of the home by the local rebuild cost per square foot.
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Replacement cost value is impacted by factors related to your home, like the cost of its building materials and whether it has a finished basement. Things like your home’s fair market value, curb appeal, and the remaining balance of your mortgage have no impact on your home’s replacement cost.
Here are a few main factors that can impact the rebuild cost of your home:
Square footage: Replacement cost value is most closely correlated with square footage since, simply put, the larger a home is, the more it will cost to rebuild.
Number of rooms: The number of bathrooms or bedrooms in your home can also impact your home’s replacement cost.
Interior features: Cabinetry, fixtures, and built-in appliances, are all included in your home’s replacement cost estimate.
Age of your home: The age of your home can also have an impact on its replacement cost. Older homes are more likely to have custom details and construction materials that are more expensive at today’s prices.
Roof and foundation type: Insurers consider the age and makeup of your home’s structure, including its roof and foundation, when calculating its rebuild value.
Renovations and additions: Major renovations made to your home, like an addition, will increase your home’s replacement cost.
Your standard replacement cost dwelling coverage may not be sufficient if you live in a region prone to disasters where repair costs can fluctuate.
Rebuild costs can skyrocket for a variety of reasons. If your neighborhood was recently hit with a tornado and every home needed to be rebuilt, the laws of supply and demand could make construction costs prohibitively more expensive, in some cases beyond your established coverage limits.
Your municipality may also have instituted a recent building ordinance which requires you to rebuild your home elsewhere. Rebuilding in the new spot may also be significantly more pricey and exceed your dwelling limit.
Some insurers offer the following policy endorsement options that act as a security blanket if your coverage limits aren't high enough to pay for a full rebuild.
Extended replacement cost coverage: Pays to have your home repaired or rebuilt to its prior condition even if the loss exceeds your dwelling coverage limit up to a capped amount. The capped amount is typically an additional percentage 25% or 50% of your coverage limit. In the event that rebuild costs soar, that means a home covered for $500,000 with 25% extended replacement cost would actually be covered for $625,000.
Guaranteed replacement cost coverage: Pays to have your home repaired or rebuilt to its prior condition regardless of the rebuild costs. There is no capped amount, so if your home was covered for $1 million but the rebuild costs jumped to $3 million, the increased costs may be covered.
Depending on your insurance company, you may be able to add extended and guaranteed replacement cost to your homeowners insurance for an additional cost.
Actual cash value policies are cheaper than standard replacement cost homeowners insurance, but they provide lower claim payouts if your property is damaged or stolen. In a standard home insurance policy, your home is generally insured at its replacement cost and your personal belongings are insured at their actual cash value.
Actual cash value factors depreciation into your claim payout, meaning if a laptop you bought five years ago is stolen, you’ll be reimbursed for the value of a five-year-old laptop rather than a new one. Most insurers give you the option of upgrading your personal property coverage to replacement cost value so that your belongings are fully covered. Adding replacement cost personal property coverage to your policy generally costs an extra $100 per year.
Not sure how to figure out your homeowners insurance rates or coverage needs? Crunch the numbers with our home insurance calculator.
A home warranty is a service contract that helps cover the cost of broken home appliances or systems, like your refrigerator, washer and dryer, and HVAC system, but warranties are limited in terms of what’s covered and may not be worth the cost.
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