Replacement Cost vs. Market Value: What’s the Difference?

Replacement cost is the cost of rebuilding your home or replacing damaged property based on current prices. Market value is the amount of money your home would sell for in the current market.

Daria Kelly Uhlig
Daria Kelly Uhlig
  • Licensed Realtor with 10+ years in personal finance content

  • Contributor to Nasdaq and USA Today

Daria is a licensed Realtor and resort property manager specializing in personal finance, real estate, and insurance topics. In her spare time, she practices photography.

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Sarah Archambault
Sarah Archambault
  • Experienced personal finance writer

  • Background working with banks and insurance companies

Sarah enjoys helping people find smarter ways to spend their money. She covers auto financing, banking, credit cards, credit health, insurance, and personal loans.

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Updated July 12, 2024

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Homeowners insurance covers the cost of repairing or replacing your home or personal property after certain kinds of damage. But how much your insurer pays toward those costs depends on your home’s calculated value and the type of coverage you purchase.

Replacement cost value is the amount of money it would cost to replace your home or your personal property with a comparable home or personal property. The market value of a home is the amount of money it would sell for on the open market.

Learn more about the difference between replacement cost and market value, as well as some other types of home insurance coverage, so you can choose the right policy for your needs.

Replacement cost defined

Replacement cost value, or RCV, is the cost to restore your home to its pre-damage condition or, if it was destroyed, replace it using comparable materials.

Take the structure of your home, for example. Homeowners insurance usually covers the dwelling’s replacement cost, so if your home is destroyed in a fire, the insurance company will pay to rebuild it using the same type and quality of materials that the original had.[1] And it’ll do so even if your home was worth less when it was destroyed than when you insured it.

Replacement cost insurance is optional when it comes to insuring your personal property, such as clothings, electronics, and furniture. If you choose RCV and lightning causes a power surge that destroys your 20-year-old washer, the insurance company will replace the destroyed machine with a brand-new one of a similar size and style.

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Factors that affect replacement cost

Several factors determine how much it would cost to replace your home, including:[2]

  • Square footage

  • Age

  • Fixtures

  • Design

  • Home features

  • Foundation type

Good to Know

A standard homeowners insurance policy covers replacement costs up to a certain limit. But you might need extended or guaranteed replacement cost coverage to fully protect yourself financially. Both cover a certain amount beyond your policy limit.

Market value defined

Market value is the price a buyer would pay for your home or land on the open market. A home’s market value could be more or less than its replacement cost, depending on the current real estate market.

The market value of personal property doesn’t really come into play for insurance purposes. Rather, insurers tend to look at actual cash value of possessions.

While your home itself might be worth more now than when you first insured it, personal property usually depreciates in value. That depreciated value, also called the actual cash value, or ACV, is what the insurer uses to calculate your reimbursement.

To see how much of a difference that can make with personal property, refer back to the previous example of the 20-year-old washing machine destroyed by a lightning strike. If the insurance company determines that its depreciated value was only $50, that’s all it’ll reimburse you for.

That means you’ll have to pay the difference between the $50 reimbursement and the cost of a new machine.

Factors that affect market value

Market value is based on the closed-sale prices of similar homes. It compares factors such as location, size, condition, improvements, and the home’s features. Market value also considers the value of your land and the local school districts.

Market value is often more relevant to personal property than the home itself, which usually has replacement cost coverage. An exception to that rule is an older home that was built using materials or to standards that are obsolete or too expensive to use in the rebuild.

That type of home might have HO-8, or modified form, coverage that usually only reimburses market value.

Learn More: Types of Homeowners Insurance Policies

Learn More: Types of Homeowners Insurance Policies

How to calculate the replacement cost of your home

To calculate the replacement cost of your home, you need professional knowledge of construction processes as well as material and labor costs. It’s nearly impossible for a homeowner to gather that information on their own.

Insurance companies typically use a replacement cost estimating software to calculate the costs. Elements of the reconstruction include square footage, the year built, architectural style, the number of stories, foundation and roof construction, kitchen and bathroom fixtures, and size and type of garage, according to CoreLogic, a real estate data and technology company.

Construction costs change over time, and as a result, so do replacement costs. So unless you have HO-8 modified form insurance, your insurance will pay the replacement cost of your home.[3] You should review your policy each year to make sure you have enough replacement cost coverage.

Pros and cons of insuring at replacement cost

Most homeowners insure their homes for replacement cost. Consider these pros and cons of replacement cost insurance:

Pros
  • Helps protect you financially if your home is damaged or destroyed

  • Fewer out-of-pocket costs to rebuild

Cons
  • Higher premium for the extra coverage amount

  • Policy’s inflation provision might not keep up with actual inflation rates

How to calculate the market value of your home

If you’re about to purchase a home using a mortgage loan, or you just recently financed a home purchase, your lender’s appraisal will tell you the current market value. Otherwise, you’ll have to hire an appraiser to find out the market value.

Appraisers have the tools, training, and license required to calculate your home’s fair market value — or the price a consumer would pay for it on the open market.[4]

An appraiser determines the market value by comparing your home to similar homes that have recently sold. They research market conditions and compare the home’s location — and other details like the home’s style, features, and condition — to other area homes.

Then, using your property as the reference, the appraiser adds to and subtracts from the comparable properties’ sale prices based on whether your home compares more favorably or less favorably on many different factors.

The appraiser documents all this information on a Uniform Residential Appraisal Report. Home values change all the time, so keep in mind that your home’s market value changes, too.

Good to Know

In general, unless you have an older home constructed of difficult-to-find materials or outdated systems that make it difficult to get a standard homeowners policy, you’re unlikely to insure your home for market value. Market value tells you how much your home is worth on the open market, but it has no bearing on the cost of rebuilding your house.

Pros and cons of insuring at market value

Even though replacement cost makes sense for most homeowners, in some situations you might have good reason to insure at market value. But before you do, consider the advantages and disadvantages.

Pros
  • Might only be able to get a lower coverage amount for certain older homes

  • Usually less expensive than replacement cost

Cons
  • Covers fewer perils and might not cover the full cost of replacing your home or belongings

  • Might not meet lender requirements for dwelling coverage

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Other types of home insurance coverage

Standard replacement cost coverage isn’t the only kind of coverage available, and in some cases, it can leave you underinsured if the cost to repair or replace your home exceeds your dwelling coverage limit. Consider whether these alternative or additional coverages might better protect your investment:

  • illustration card https://a.storyblok.com/f/162273/150x150/79b027a857/house-rental-96x96-yellow_050-budget.svg

    Actual cash value

    An ACV policy pays to repair your home or replace personal items but with a deduction for depreciation and accounting for age, normal wear and tear, and other factors that can affect an item’s value. ACV coverage generally costs less than RCV coverage, but settlements are usually lower, and you may be financially responsible for repair or replacement costs.

  • illustration card https://a.storyblok.com/f/162273/150x150/42a396bd18/credit-and-loan-96x96-green_033-discount.svg

    Extended replacement cost

    An extended replacement cost policy provides extra coverage beyond your dwelling insurance limit — typically between 125% and 200%. Extended replacement can help protect you financially if building costs in your area increase unexpectedly.

  • illustration card https://a.storyblok.com/f/162273/150x150/1f77dd73f2/money-96x96-orange_042-invoice.svg

    Guaranteed replacement cost

    Guaranteed replacement cost coverage pays the full cost to rebuild your home even if it exceeds your dwelling insurance coverage, providing the most protection.

Replacement cost vs. market value FAQs

The type of coverage you choose to insure your home can have major financial consequences if you have to repair or replace your property due to damage — especially if you need to rebuild your home. Consider this additional information before choosing the best coverage for your needs.

  • Does the amount of replacement cost coverage you choose affect your home insurance premium?

    Yes. Standard replacement coverage generally costs less than extended replacement cost coverage or guaranteed replacement cost coverage.

  • Is a home’s replacement cost higher or lower than its market value?

    Your home’s replacement cost is generally lower than its market value. But many variables can affect a home’s value, like the cost to rebuild, its location, and the current real estate market.

  • Is it better to have actual cash value or replacement cost?

    In general, it’s better to have your home and property insured for their replacement cost instead of actual cash value. Actual cash value factors in depreciation and may not be enough to cover the cost to repair or replace your home.

  • How much home insurance coverage do you need?

    Experts recommend insuring your home for at least 80% of its replacement cost. But insuring your home for its full replacement cost value will provide the most protection.

Sources

  1. Insurance Information Institute. "Homeowners Insurance Basics."
  2. Insurance Information Institute. "Insurance for Your House and Personal Possessions."
  3. Insurance Information Institute. "Is Your Home Properly Insured? The Three Most Important Questions to Ask Your Insurer."
  4. National Association of Realtors. "How Much Power Do Appraisers Have Over Home Value?."
Daria Kelly Uhlig
Daria Kelly Uhlig

Daria Uhlig is a freelance writer and editor with over a decade of experience creating personal finance content. Her work appears on USA Today, Nasdaq, MSN, Yahoo Finance, Fox Business, GOBankingRates and AOL. As a licensed Realtor and resort property manager, she specializes in real estate topics, including landlord, homeowners and renters insurance. In her spare time, Daria can be found photographing people and places on Maryland's Eastern Shore. Connect with her on LinkedIn.

Sarah Archambault
Sarah Archambault
  • Experienced personal finance writer

  • Background working with banks and insurance companies

Sarah enjoys helping people find smarter ways to spend their money. She covers auto financing, banking, credit cards, credit health, insurance, and personal loans.

Featured in

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