How to calculate your home’s replacement cost

The replacement cost of your home is a vital calculation to getting the correct amount of home insurance. You need to get as close as possible to the actual amount required to rebuild your home in case of a total loss.

Your homeowners insurance policy’s dwelling coverage should be based on your home’s replacement cost so that there is enough coverage to rebuild your home from the ground up.

How to estimate the replacement cost of a home

For example, let’s say your home is 1,500 square feet and the average cost per square foot to rebuild a home in your area is $100. If we use the above-mentioned formula:

1,500 x $100 = $150,000. That would be your estimated replacement cost.

Using this replacement cost formula is free, but it is only an estimate. Hiring an appraiser will get you the most accurate replacement cost estimate; insurance companies also have more detailed replacement cost calculators.

What is the replacement cost of your home?

The replacement cost of your home is the dollar amount it would take to rebuild your home after it has been destroyed. This cost should reflect how much it costs to rebuild your home today, and not when you originally purchased it. 

The replacement cost is used to calculate your home’s dwelling coverage. If your home is completely destroyed and needs to be rebuilt, your replacement cost should be enough to rebuild it completely. 

Inflation, renovations and other changes can affect the replacement cost of your home, so it’s important to review it annually.

Other ways to estimate the replacement cost of a home

There are other ways you can calculate the replacement cost of your home, and both will be more accurate. You can:

1. Hire a licensed appraiser: A local appraiser will inspect your home to calculate how much a rebuild would cost. 
2. Get a replacement cost calculation from an insurance company: Insurance company dwelling replacement cost calculators use the information you provide about the details of your home to estimate how much it would cost to rebuild your home. Insurance company calculators are far more detailed than a simple estimate.

Hiring a licensed appraiser is the most expensive way to determine the replacement cost of your home, but it is also the most accurate. 

Types of replacement cost policies

Insurance companies offer a variety of coverage options to ensure inflation and other price changes don’t leave you underinsured.

Replacement cost coverage

This coverage includes the calculated replacement cost of property damaged or destroyed in an insured event. Standard replacement cost coverage pays for the replacement of property at the calculated replacement cost rather than its depreciated value. To ensure this is accurate, review it every year.

Extended replacement cost coverage

With an extended replacement cost endorsement, your homeowners insurance policy will pay for repairs that exceed your dwelling coverage up to a limit. This is usually 25% or 50% more, depending on the policy.

Guaranteed replacement cost coverage

With a guaranteed replacement cost endorsement, your homeowners insurance will pay for all of the rebuild costs, no matter how much it costs. That means even if your rebuild costs are double your dwelling coverage, your homeowners insurance will pay for it.

The replacement cost of your home is an important consideration when you’re buying homeowners insurance — you’ll want to make sure your dwelling coverage is high enough to cover the costs of a total rebuild. But you can always add endorsements to your policy to ensure you have adequate coverage. 

Factors that affect the cost of rebuilding your home

The details of your home affect its replacement cost. When calculating the replacement cost, take the following  into account:

• Building codes. If your area has newer building codes, your home may be more expensive to rebuild. 
• Construction costs. Construction costs are different across the country. You can get an estimate from a local contractor.
• Foundation of your home. The type of foundation you have, such as a basement, can increase how much your home costs to rebuild.
• Attached structures: Garages and decks factor into your rebuild cost.
• Renovations: If you’ve upgraded your home, it will increase the cost of rebuilding it. 
• Square footage: The more square footage your home has, the more expensive it will be to rebuild.
• Interior and exterior materials: High-end materials, like granite counters and hardwood floors, increase rebuild costs beyond the average.

How to calculate dwelling coverage

The dwelling coverage you have is the main part of an insurance policy. If you have $500,000 in dwelling coverage, then your homeowners insurance policy will pay out a maximum of $500,000 to rebuild your home, regardless of construction costs. 

Your dwelling coverage should equal (or exceed) your home’s replacement cost because you want it to fully cover the costs of rebuilding your home. Make sure it’s as accurate as possible.

The 80% rule

The 80% rule is a standard that most insurance companies follow. If your home is insured for less than 80% of its replacement cost, the insurance company can reduce the amount of the claim it will pay. The 80% rule applies only to partial claims and not to total loss claims. If the home is a total loss, the insurance company will pay the entire dwelling coverage limit.

The 80% rule is used to prevent homeowners from purposely underinsuring to reduce premiums.

What’s the difference between actual cash value and replacement cost value?

Insurance companies use to methods of paying claims: actual cash value (ACV) or replacement cost value (RCV). ACV policies reimburse policyholders for the current replacement cost of their home minus depreciation. If your home is destroyed, you will receive the home’s replacement cost at the time of the loss, minus any depreciation. 

In contrast, RCV policies reimburse policyholders for the cost of rebuilding their homes, regardless of depreciation. If your home is destroyed, you will get enough money to rebuild it, irrespective of depreciation value.

Standard home insurance policies use RCV for the dwelling coverage on your home.

Shivani Gite contributed to this story.

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