How to find your home’s replacement cost

Replacement cost is the amount it would take to rebuild your house to the way it was in the event it’s destroyed. Your home should be covered for at least 80% of its true replacement cost.

If you’ve ever shopped around for homeowners insurance or looked at your policy declarations page, you may have noticed the term replacement cost. In homeowners insurance, replacement cost value is the amount it would take to rebuild your home in the event it’s damaged or destroyed.

Your policy’s dwelling coverage limit (the amount your house is insured for) should be based on the home’s replacement cost, not its market value or the value of the mortgage.

To figure out your dwelling coverage limit, you’ll need to get an accurate replacement cost estimate of your home. Your replacement cost estimate is calculated based on factors like the square footage of your home, number of bathrooms, and local building costs per-square-foot.

KEY TAKEAWAYS

  • Replacement cost refers to the amount it would cost to rebuild your home at current market prices or replace damaged or stolen property with similar items

  • The replacement cost estimate of your home is based on details like its square footage, number of bathrooms, its age, roof type, and the building cost per square foot in your location

  • Your insurance company will likely require that your home be insured for at least 80% of its true replacement cost, otherwise they may not cover the entire cost to rebuild your house

  • Consider extended or guaranteed replacement cost for additional replacement value coverage

What is replacement cost homeowners insurance?

Replacement cost value is the amount it would take to rebuild your house with materials of similar type and quality — or the amount it would cost to replace your personal belongings with new items — without factoring depreciation into the claim estimate.

When you file a claim for something like roof damage after a storm, 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.

Replacement cost coverage and the 80% rule

In order to receive a full replacement cost payout in the event your home is badly damaged or destroyed, your insurer will require that your house be insured for at least 80% of its true replacement cost value. If your home is insured below 80% of its actual rebuild cost, your insurer may only reimburse you for its actual cash value.

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Replacement cost coverage vs. actual cash value

Although it’s an increasingly rare and outdated form of coverage, some insurers also offer actual cash value (ACV) policies. Actual cash value homeowners insurance costs less but provides less protection than replacement cost homeowners insurance.

If your home or personal belongings are insured at their actual cash value, depreciation is factored into your loss settlement. That means if your five-year-old laptop is stolen, you’ll be reimbursed for the value of the laptop after five years of depreciation instead of a brand new one.

Actual cash value payouts typically result in a lower reimbursement than replacement cost and they’re generally not worth the reduced insurance premium.

How to calculate the replacement cost of your home

When you get a quote from a homeowners insurance company, the initial dwelling coverage recommendation is based on the insurer’s replacement cost estimate. This amount is calculated based on details provided in your insurance application and property data obtained from third-party companies.

However, if you’re not certain that the insurer-recommended replacement cost estimate is accurate, consider the following:

Talk to local contractors or an independent appraiser

Contact 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.

Use a replacement cost estimator

There are several replacement cost calculators available online which can offer more comprehensive rebuild estimates of your home. These tools take several factors into consideration, such as:

Try a DIY replacement cost estimate

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.

Factors that impact your home’s replacement cost estimate

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:

1. 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.

2. Number of rooms

The number of bathrooms or bedrooms in your home can also impact your home’s replacement cost. In fact, any interior features, like cabinetry, fixtures, and built-in appliances are all included in your home’s replacement cost estimate.

3. 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.Extended or guaranteed replacement cost coverage

Extended or guaranteed replacement cost coverage

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.

As a security blanket, some carriers offer settlement provisions that extend your limits.

  • Extended replacement cost settlements pay 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 settlements pay 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.

Extended and guaranteed replacement cost can be added to your homeowners insurance as a policy endorsement for an additional premium. Some insurance companies may also offer these protections and other coverage enhancements in higher policy tiers.

Homeowners Insurance Expert

Pat Howard

Homeowners Insurance Expert

Pat Howard is a homeowners insurance editor at Policygenius in New York City. He has written extensively about home insurance cost, coverage, and companies since 2018, and his insights have been featured on Investopedia, Lifehacker, MSN, Zola, HerMoney, and Property Casualty 360.

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