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What is the replacement cost of a home?

The replacement cost of a home does not equal the home’s market value but instead reflects the cost of rebuilding a home that has suffered damage.

There are countless factors to consider when it comes to homeownership. Whether it’s home insurance policies, protecting against flooding, or upgrading your home, one important factor that you shouldn’t forget is the replacement cost of your home. While it might be logical to assume that the replacement cost is equal to the market value of your home, the replacement cost is actually equal to the amount of money it would cost to physically rebuild the home from scratch.

So what do you need to know about your home’s replacement cost? And what can you do to make sure your homeowners insurance policy adequately covers that cost? Read on to find out!

Replacement Cost 101

Simply put, the replacement cost —or rebuild cost —of a home is the amount of money required to completely rebuild your home with similar building materials. Of course, a home can sustain damage that isn’t total, but for the purposes of insurance coverage, the replacement cost typically encompasses a full rebuild of the home.

When selecting homeowners insurance, you’ll be asked to select a dwelling coverage amount, which can effectively act as your replacement cost coverage. What is extremely important to note is that many insurers might not provide full coverage to your home if it is not insured to at least 80 percent of the home’s rebuilding cost. With that in mind, it’s a good idea to know how much it would cost to rebuild your home.

Generally speaking, if you can accurately calculate your home’s replacement cost and enroll in an insurance policy that has sufficient buildings insurance, you can rest assured that your insurance company will be able to pay you adequately if you file a claim.

Actual Cash Value vs. Replacement Cost Value

While some policies will include replacement cost, some might be insuring a home based on actual cash value ( ACV ). The main difference between the two is that one takes a property’s depreciation into account, while the other does not.

Policies that operate under the actual cash value framework will invariably factor in depreciation when calculating your payout for a given claim. This means that you will likely receive lower payouts the older your home is. So if you have roofing that is nine years into its 10-year lifespan, you’ll likely be getting much less money to replace it. Each insurance company is likely to have its own formula for calculating the impact of depreciation on a given payout, but the majority function under the premise that a claim’s payout will reduce based on how old the item is.

On the other hand, policies that operate under the replacement cost framework do not take depreciation into account when calculating a payout. Instead of the payout decreasing due to depreciation, it is influenced by the current market prices, ignoring the rise of building costs.

As mentioned previously, you will need to make sure that your homeowners insurance plan has enough coverage to meet at least 80 percent of the home’s replacement cost. This is what’s known as the “80/20 rule” and can determine whether your insurance company will cover the full cost of your home.

When it comes to standard home insurance policies, dwelling coverage tends to use replacement cost, while contents coverage tends to use actual cash value. In some cases, insurers might initially pay you the actual cash value of the dwelling, followed by later reimbursements for repair or construction costs.

Generally speaking, fewer and fewer insurance companies are using the actual cash value model, given how many policyholders prefer replacement cost valuation.

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What Can Impact Replacement Cost Value?

As with many types of insurance, your specific situation and the condition of the property can have a direct impact on replacement cost. As stated previously, market value does not equal replacement cost, as market value takes other factors like land value into account.

  • Age: The age of a home can have a major influence on the replacement cost value. For older homes, which were built many years ago and have outdated features and essential systems, you can expect the replacement cost value to exceed the home’s market value.

  • Building codes: In the same vein as a home’s age, local building codes can also influence replacement cost value. As local governments update building codes, you may not be required to make immediate updates to your home to comply with those codes. However, if you have an older home that is damaged or destroyed, the replacement cost will need to include the cost of rebuilding the home while meeting current building codes.

In addition to the home’s age and the relevant building codes, you can also expect the replacement cost to change because of some of these other finer details:

  • Square footage and height

  • Attached structures

  • Swimming pools and spas

  • Electrical wiring systems

  • Plumbing systems

  • Heating systems

  • Cabinet and countertop quality

  • Quality of materials for roofing, siding, and framing

  • Size of windows

  • Built-in appliances

  • Architectural design

How Do I Calculate My Home’s Replacement Cost?

One of the easier ways of calculating your home’s replacement cost is by using a replacement cost calculator. The only major drawback is that, unless you’ve already done a significant amount of legwork in taking certain values into account, online replacement cost calculators won’t be entirely accurate.

It is, however, totally possible to make the calculations yourself, though it’ll take a bit of doing.

The first thing you’ll want to do is a bit of research on the average cost per square foot of building a home in your area. You can figure this out by contacting home-builders, real estate agents, or home insurance agents to get a figure and multiplying that value by the number of square feet in your home. This should give you the amount of your insurance replacement cost.

For more specific elements of your home, you can consider the following:

  • Personal belongings: Having a solid accounting of the value of your personal property can help you figure out what you’ll need to replace (and its cost).

  • Interior features: Things like kitchen appliances, cabinets, bathroom features, or design features can all influence the overall cost of replacement. Getting quotes for installation costs can help give you an idea of how much it’ll cost to replace these features.

  • Roofing materials: Roofs can come with varying materials and lifespans. The best thing to do would be to contact a roofing specialist to get an estimate of how much it would cost to replace your roof.

  • Flooring materials: As with roofing, you’ll want to check with a local contractor for an estimate of how much it would cost to replace and install flooring in your home.

  • Exterior features: Things like patios, decks, pools, and other external structures can significantly increase the replacement cost of your home.

If you’re not too confident in calculating the rebuilding cost on your own, you could definitely turn to an independent appraiser. Though each appraiser might have a slightly different formula, you can rely on them to take many of the previously mentioned factors into account when appraising the value of your home.

Frequently Asked Questions

  • Many home insurance companies offer various endorsements that can expand on what your insurance covers. One of these endorsements is what’s known as extended replacement cost coverage. This type of coverage increases your policy’s coverage limits and insures your home beyond its replacement cost value. Getting this type of endorsement can help combat monetary inflation and its effect on the value of your home.

  • This type of home insurance coverage basically allows for full coverage of your home’s replacement cost, regardless of policy limits. The rebuild cost of your home can change over time, as can construction costs.  Overall, if you can afford them, these types of policies are a great way to provide extra financial protection should you need to rebuild your home.

  • Much of the time, you’ll be able to declare the replacement cost of your home when dealing with insurance companies. It would be wildly irresponsible and detrimental to your financial safety if you were to arbitrarily decide on a replacement cost. The best thing for you is to do your due diligence in coming up with accurate figures, contacting appraisers, and giving as accurate a replacement cost as possible.

Rebuild Costs: Do Your Homework!

Whether you’ve got a brand- new home or a home that’s lasted decades, every home will need a facelift in one capacity or another. Whether you’re redoing the roof, the flooring, or the whole house after a natural disaster, having the right rebuild cost is essential to make sure your insurance policy works for you! Find the best coverage at the cheapest rates with Insurify.

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Adrian Coto
Adrian CotoInsurance Writer

Originally from Los Angeles, California, Adrian Coto is a writer living in Brooklyn, New York. A graduate of the NYU Creative Writing MFA program, he's worked as a legal assistant, a law school administrator, and now as a copywriter and editor.