How to Estimate Replacement Cost for Homeowners Insurance
Multiplying your home’s square footage by local per-square-foot construction costs is a good starting point for estimating the cost to rebuild your home.
13+ years writing insurance and personal finance content
Insurance, lending, and retirement expert
Jacqueline has contributed content, and her personal finance passion, to dozens of noteworthy financial brands, including Credit Karma, Bankrate, and MagnifyMoney.
Evelyn PimplaskarEditor-in-Chief, Director of Content
10+ years in insurance and personal finance content
30+ years in media, PR, and content creation
Evelyn leads Insurify’s content team. She’s passionate about creating empowering content to help people transform their financial lives and make sound insurance-buying decisions.
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If a covered disaster destroys your home, its replacement cost is the amount you’d need to rebuild the house using materials of similar quality. Replacement cost is an important number to know because it affects just how much insurance — specifically, dwelling coverage — you should buy to fully protect your home.
A home’s rebuilding costs can change with inflation, rising home values, changes in the cost of construction materials and labor, and other factors. It’s a good idea to recalculate your home’s replacement cost from time to time to ensure you have adequate homeowners insurance, and a replacement cost estimator can help.
Let’s look at replacement cost, how it works, and what to know about estimating your home’s replacement costs.
What is replacement cost in homeowners insurance?
When a covered event damages or destroys your home, your insurer can value your loss at your home’s actual cash value (ACV) or for replacement cost, depending on your insurance policy. The type of value will affect how much your insurer pays out for your claim.
Replacement cost looks at the expense of repairing or rebuilding your home. It doesn’t factor in depreciation. So your insurance company will pay the actual cost to fix up your home — but only up to your policy’s dwelling coverage limits.[1]
This is why accurately estimating your replacement cost is so important. Your dwelling coverage limits should be as close as possible to what it would actually cost to rebuild your home, including labor and materials expenses.
What is a replacement cost estimator?
It’s fairly standard practice in the home insurance industry to use a replacement cost estimator to determine the replacement cost of a home.
These estimators can help predict how much you need to spend to completely rebuild your home using the same quality of materials originally used, regardless of market conditions. Replacement cost coverage is the best way to ensure you can afford to restore your home to its original glory in the event of damage or you if experience a total loss.
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How to estimate your home’s replacement cost
A simple way to estimate how much it’d cost to rebuild your home is to multiply its square footage by your area’s average per-square-foot construction costs. For example, if your home is 1,700 square feet, and the local cost in your area is $180, it’ll cost approximately $306,000 to rebuild your house. Your dwelling coverage should be for at least that amount.
Local builders and real estate agents can be good resources for finding out your area’s construction costs.
While you can get a replacement cost estimate from your homeowners insurance company or an insurance agent, you can also hire a professional appraiser if you’re looking for a second opinion.
To get a quick idea of your home’s replacement cost, you can plug information about your home into a home replacement cost calculator.
Factors that affect home replacement costs
When determining your home’s replacement cost value, a handful of different factors are taken into account, including your home’s:
Square footage: The bigger your home is, the more it’d cost to repair or replace it, as each additional square foot requires more material and labor.
Age: Building standards have changed greatly over the years. For example, older homes may have more expensive exteriors made of materials like solid brick, whereas newer homes may be made with less expensive brick veneer.
Fixtures: The style of materials used in your home also comes with varying costs. If you have marble countertops, your kitchen will be more expensive to rebuild than a home with tile counters.
Style: Simpler home styles cost less to rebuild than more ornate ones.
Features: Floors, the roof, and other areas of your home feature varying materials that come at different price points.
Foundation: Is your home built upon a slab or crawl space? Do you have a basement? Is the basement finished? All kinds of foundation details need to be taken into account.
Quality of construction materials: Homes with luxury construction materials like exotic hardwoods or marble cost more to rebuild with similar materials.
Local building materials cost: Materials costs can fluctuate from region to region depending on factors like availability and the local market.
Local labor costs: The cost of skilled labor varies by location depending on circumstances like cost of living in an area and the availability of workers.
Types of replacement cost
When you buy a homeowners insurance policy, you can choose from multiple types of replacement cost. The option you select will affect how much you might receive from your insurance company if you have to file a claim.[2]
Here are replacement cost options to consider.
Actual cash value
If your home insurance pays claims at actual cash value, you’ll receive the replacement cost of the item less depreciation. For example, if a windstorm damages your 20-year-old roof, and it will cost $15,000 to replace it with a similar type of shingles, your insurer will calculate the depreciation for the original roof and subtract that amount from your claims payout.
Reproduction cost
Reproduction cost coverage aims to cover the expenses of repairing, rebuilding, or replacing covered losses with identical materials at original specifications.[3] For example, if you own a Victorian-era home with original hardware, reproduction cost coverage would pay out enough to purchase the same type of antique hardware.
Extended replacement cost
Extended replacement cost pays a certain percentage over the policy coverage limit to rebuild your home. This percentage is often around 20% or more, depending on the insurer. This additional buffer ensures that unexpected spikes in building costs, caused by factors like material shortages or a lack of construction workers, can be covered without financial strain on you.
Guaranteed replacement cost
This policy type goes a step further than extended replacement cost coverage, covering the complete cost of rebuilding your home to its original state, even if it surpasses the policy limits. Guaranteed replacement cost protects you from unforeseen hikes in construction expenses. But it’s important to note that this type of policy might not cover upgrades necessary to comply with current building codes. As such, it may not be available for older homes.
Replacement cost estimator FAQs
Still on the fence about whether or not a replacement cost estimator is right for you? Check out this additional information on the topic.
How is replacement cost calculated?
Replacement cost is calculated by estimating the amount needed to rebuild or replace a property with materials of similar kind and quality, all without accounting for depreciation. Factors such as construction costs, materials, labor costs, and other associated expenses are considered to determine the total replacement cost of your home.
What’s the difference between replacement cost and appraisal?
An appraisal occurs when you apply for a mortgage loan. You hire a licensed appraiser to review the home and give you the home’s estimated market value.
The estimated replacement cost, on the other hand, has nothing to do with the market value to other buyers. Instead, it looks at how much it would cost to rebuild the home from the ground up if necessary.[4]
What’s the 80/20 rule for home insurance?
The 80/20 rule in home insurance stipulates that homeowners should have home insurance coverage amounting to at least 80% of their home’s replacement value. Adhering to this rule is crucial for securing full coverage and avoiding penalties for being underinsured.
How do you know if your replacement cost is too high?
A replacement cost estimator can help you ballpark how much it might cost to rebuild your home — and the result should give you an idea of whether your current dwelling coverage is on target or more than you need. You can also hire a professional appraiser to give you a more accurate valuation of your home.
How often should you reassess the replacement cost of your property?
Ideally, you’ll review and update your homeowners insurance coverage each year to make sure your home has the right amount of protection.
During college, Jacqueline DeMarco interned at a retirement plan advisory firm and was tasked with creating a presentation on the importance of financial wellness. During her research into how money can affect our health, relationships and career, Jacqueline realized just how important financial education is. Jacqueline is a contributor for Insurify and has worked with more than a dozen financial brands, including LendingTree, Capital One, Credit Karma, Fundera, Chime, Bankrate, Student Loan Hero, ValuePenguin, SoFi, and Northwestern Mutual, providing thoughtful content to give readers insight into complex topics that they likely didn’t learn in school.
Jacqueline has been a contributor at Insurify since October 2022.
Evelyn PimplaskarEditor-in-Chief, Director of Content
10+ years in insurance and personal finance content
30+ years in media, PR, and content creation
Evelyn leads Insurify’s content team. She’s passionate about creating empowering content to help people transform their financial lives and make sound insurance-buying decisions.
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