Your homeowners insurance policy’s limit should be based on the replacement cost of your home, meaning the cost to rebuild it, not its market value. Your replacement cost estimate is based on factors like your home’s square footage, number of bathrooms, and local building costs per square foot.
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
What is replacement cost?
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. 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.
Let’s look at an example.
The average construction cost of a single-family home is about $114 per square foot, according to The National Association of Home Builders.  If you have a 2,000-square-foot home, your home’s replacement cost would be roughly $228,000 ($114 multiplied by 2,000 square feet). Keep in mind that is just a rough estimate and your replacement cost will likely be higher than that example if your home has ornate features or roofing.
What is the 80% rule?
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.
Actual cash value vs. replacement cost coverage
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.
Actual cash value policies are cheaper than replacement cost policies, 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.
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.
Replacement cost vs. market value
As mentioned, replacement cost is the amount it would cost to rebuild your home from the ground up with similar construction materials. Market value is how much your home is worth on the housing market if you were to sell it.
Your home’s market value actually has nothing to do with how much homeowners insurance coverage you need. The market value of your home depends on a variety of factors, like the neighborhood, acreage, and real estate market. Your home’s market value can be higher than its replacement cost since it depends on the housing market — meaning if you were to base your homeowners insurance coverage off of its market value, you’ll likely be overinsured and overpaying.
How to calculate the replacement cost of your home
There are a few different ways to get a replacement cost estimate for your homeowners insurance policy.
1. Use the insurance company’s estimate
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.
2. Hire a licensed appraiser or contractor
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.
3. Use an online replacement cost calculator
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.
4. 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:
Square footage: Replacement cost value is most closely correlated with square footage, since 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 will increase your home’s replacement cost.
Levels of 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.
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 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 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 coverage would actually be covered for $625,000.
Guaranteed replacement cost coverage: Pays to have your home 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 cost would be covered.
Depending on your insurance company, you may be able to add extended and guaranteed replacement cost coverage to your homeowners insurance for an additional cost.
Frequently asked questions
Is replacement cost the same as dwelling coverage?
No, but your home’s replacement cost will determine how much dwelling coverage you need. Dwelling coverage is the part of your homeowners insurance policy that pays to rebuild your home from the ground up after a covered disaster. Once you know your home’s replacement cost, you’ll have an idea of how much dwelling coverage to buy.
What is the formula for calculating home replacement cost?
You can get a rough estimate of how much your home’s replacement cost is by multiplying the square footage of your home by local rebuild costs per square foot.
Which is better: ACV or home replacement cost?
Replacement cost pays out more for a covered loss since it doesn’t factor in depreciation like actual cash value (ACV) policies do. Most standard home insurance policies insure your dwelling at its replacement cost and your personal belongings at their actual cash value. You may have the option to upgrade your personal property coverage to replacement cost, but it’ll cost more.