Your home’s replacement cost value is one of the most important pieces of information you need to get the right amount of homeowners insurance. An improper estimate can leave you underinsured or overinsured. Since either situation can cost you money, here’s how to accurately calculate the replacement cost value of your home.
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What is my home’s replacement cost value?
The replacement cost value of your home is the estimated cost of rebuilding it to its current specifications in the event it is completely destroyed.
Your home’s replacement cost value is typically used to determine your policy’s dwelling limit, which is the maximum amount your insurance company pays for structural damage to your home.
If you have a mortgage, your lender is likely to require you to insure your home at its replacement value. However, if you have a low loan balance, this requirement may drop to 80% of its replacement value.
Whether you have a mortgage or not, underestimating your home’s replacement cost value may leave you short of funds to rebuild in the event of a major or total loss. Overestimating your home’s replacement cost value may leave you paying for more insurance than you need.
These are the main reasons why it’s so important to make sure you have an accurate estimate of your home’s replacement cost value when you compare homeowners insurance quotes.
Replacement cost value vs. market value
Your home’s replacement cost value is different from its market value, which is the estimated price your home may fetch in a sale.
Factors such as location and the size of your lot factor into your home’s market value. Your home’s replacement value is based primarily on the costs of labor and building materials.
For example, a home located in a prestigious neighborhood is likely to have a higher market value than an identical home in a modest neighborhood in a nearby county. However, the replacement cost values of both homes may be nearly the same.
Replacement cost value vs. actual cash value
Replacement cost coverage pays to repair or rebuild your home to its current condition, while actual cash value coverage deducts depreciation from your insurance payment.
For example, if your roof needs to be replaced after a windstorm, a replacement cost policy pays to install a new roof that is similar to the old one. An actual cash value policy caps its payment at the roof’s deprecated value, which leaves you responsible for the remainder of the installation costs.
Since replacement cost coverage generally provides higher payments for claims than actual cash value coverage, it also costs more.
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How do I calculate my home’s replacement cost value?
Most insurance companies use software to calculate your home’s replacement cost, but you are responsible for providing accurate details about your home and reviewing their estimates.
Details needed to estimate your home’s replacement value
You typically need to provide your insurance company with more than a dozen details about your home’s construction features to get an accurate estimate of its replacement value.
These details include:
- ZIP code
- Construction year
- Foundation type (crawlspace, basement, etc.)
- Home’s construction style and materials (frame, masonry, veneer, etc.)
- Roof style and materials (gabled, flat, hip, asphalt, architectural shingles, etc.)
- Siding materials
- The size and style of your garage (attached, built-in, etc.)
- Total living area (in square feet)
- Number of stories
- Number of bedrooms
- Whether the home sits on a slope or flat land
- Quality grade of your floors, counters and cabinets
- Primary heat source
- Age and type of heating and cooling systems
- Age of plumbing and electrical systems
- Date of the home’s most recent renovations
You can find most of these details online by looking up your home on your county assessor’s website. Most of this information can usually also be found in any inspection reports you or your lender may have ordered when you bought the home.
Before you provide these details to your insurance company, make sure they accurately reflect your home’s current specifications.
If your home has undergone any renovations by you or prior owners, you should make sure any insurance companies you contact for a quote have information about these upgrades.
It’s also best to notify your insurance company when you complete new renovations, as these may increase the amount of dwelling coverage you need.
How to review your home’s replacement cost estimate
The software insurance companies use to determine your home’s replacement value tends to be accurate, but you should still review these estimates to make sure.
Most insurance companies list the key details they have about your home in your quote. As you review your quote, make sure this information matches your home’s characteristics.
You can also check to make sure the insurance company’s estimate is consistent with local building costs.
In most communities, the cost of building homes ranges from $200 to $400 per square foot of living area, depending on local costs and the quality grade of the home. Basements add another $50 to $100 per square foot to these costs.
It’s usually pretty easy to find your community’s average construction costs online.
When you divide the insurance company’s estimate of your home’s replacement value by your home’s square footage, your calculation should fall in line with local averages.
If you have a custom home built with high-quality materials, your home’s replacement value is likely to be a little higher than local averages. The replacement value of a modest home with lower-grade features is likely to be lower.
If an insurance company’s estimate of your home’s replacement value is considerably higher or lower than local building costs, ask them why. There may be a good reason, or the insurance company may need to recalculate its estimate.
When to consider an appraiser
If you don’t agree with the insurance company’s calculation of your home’s replacement value and/or it’s out of line with local estimates, you can hire an appraiser for a more accurate estimate.
If you have a high-value home, your insurance company may send an appraiser out to your home at no charge.
A licensed appraiser has the training and resources to provide an accurate estimate of a home’s replacement value. However, the services of an appraiser may cost you a few hundred dollars or more.
Bear in mind that a replacement cost appraisal is different from the type of appraisals lenders require for a loan. The latter focus on a home’s market value.
What if my home’s replacement value estimate is wrong?
The consequences of inaccurately calculating your home’s replacement value range from being underinsured to overpaying for insurance.
Costs of underestimating your home’s replacement value
The most obvious consequence of underinsuring your home is the potential of not having enough money to rebuild if your home sustains major or total damage.
For example, if you insure your home for $275,000, and it costs $325,000 to rebuild it after a fire, you have to cover the $50,000 shortfall.
Underinsuring your home by more than 20% can also reduce your payments for partial damage. Under what is sometimes called the 80-20 rule, most insurance companies reduce your payment on any claims if you insure your home for less than 80% of its replacement value.
For example, if you insure a $275,000 home for $200,000, or 73% of its replacement value, and a kitchen fire causes $60,000 worth of damage, your insurance company may only cover $55,000 in repairs.
Costs of overestimating your home’s replacement value
The main consequence of overestimating your home’s replacement value is paying for more insurance than you need.
Our research shows that the average cost of insurance for homes valued at more than $275,000 increases by about $8 a month for each additional $15,000 increment in dwelling coverage.
If you insure a $300,000 home for $345,000, you end up paying about $24 a month more for insurance than you should.
| Dwelling limit/replacement value | Annual rate | Monthly rate |
|---|---|---|
| $275,000 | $2,355 | $196 |
| $350,000 | $2,836 | $236 |
| $425,000 | $3,344 | $279 |
| Note: Average rates are based on non-binding estimates provided by Quadrant Information Services. Your rates may vary. | ||
What is extended or guaranteed replacement cost coverage?
Extended replacement cost and guaranteed replacement cost are coverages that essentially increase your policy’s dwelling limit.
Some companies include either extended replacement cost or guaranteed replacement cost as built-in policy features. However, it’s more common to see either or both offered as an optional endorsement you can add to your policy for an additional cost.
Extended replacement cost coverage increases your dwelling limit by a specified amount, typically in the 10% to 25% range. If the costs of repairing or rebuilding your home exceed your dwelling limit, your policy provides additional funds, up to your extended replacement cost limit.
With guaranteed replacement cost coverage, the insurance company covers all repair or rebuild costs that exceed your policy’s dwelling limit.
Extended and guaranteed replacement cost coverage both typically come with a big exclusion: Neither covers modifications to your home that may be required during the repair or rebuild process to comply with building codes enacted after your home was originally built.
Most companies offer a separate “ordinance-or-law” endorsement to cover these latter costs.
Nevertheless, adding extended or guaranteed replacement cost coverage to your homeowners insurance, along with an ordinance-or-law endorsement, is usually worth the price.
At the very least, you should ask the insurance companies you contact for quotes to show how adding these endorsements may affect your rate.
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