Your home’s replacement cost is one of the most important pieces of information you need for your homeowners insurance policy, but it is also one of the trickiest to pin down. Whether you're shopping for a new policy or just reviewing your existing coverage, here are key things to know about calculating the replacement cost of your home.
In this article:
What is my home’s replacement cost?
The replacement cost of any item is the current price of replacing it with another item of the same kind and quality. The replacement cost of your home is the price of rebuilding it to its current specifications and standards if it is completely destroyed.
Replacement cost vs. market value
Replacement cost is different from a home’s market value, which includes the price of the land, as well as the supply and demand for homes in your community. A home’s replacement cost is determined primarily by the price of materials and labor.
If you took two identical homes and set one near a popular beach and another in a modest suburb about 50 miles away, the market value of the beach home would probably be considerably higher than the other one. However, their replacement costs would be nearly the same.
Replacement cost vs. actual cash value
The actual cash value of an item is its replacement cost minus depreciation. For example, if your roof was installed five years ago for $5,000, its actual cash value today, after depreciation, might only be $4,500.
Most insurance policies insure homes on a replacement cost basis, which is reflected by your policy’s dwelling limit, or coverage A. This is the maximum amount of money the insurance company will provide to rebuild your home, in the event of a total loss.
However, if your home’s replacement cost exceeds its market value, you might have to insure it at a lower amount, such as its actual cash value.
Why does an accurate replacement cost estimate matter?
An accurate estimate of your home’s replacement cost allows you to obtain the right amount of homeowners insurance coverage.
What happens if I underestimate my home’s replacement cost?
If you underestimate the replacement cost of your home and it is completely destroyed, you’ll be responsible for the shortfall. If, for example, your home costs $325,000 to rebuild after a fire, but you’ve only insured it for $275,000, the $50,000 difference will come out of your pocket.
Underestimating your home’s replacement cost could also leave you in the lurch after a partial loss, such as a kitchen fire. If you don’t insure your home for at least 80% of its replacement cost value, the insurance company can withhold a portion of the funds you would otherwise receive for repairs.
What if I overestimate my home’s replacement cost?
If you overestimate your home’s replacement cost, you’ll end up paying for more insurance coverage than you need.
For example, if you insure your home for $325,000, and it only costs $275,000 to rebuild, you’re paying for an extra $50,000 in coverage you don’t need.
How much does this cost?
The impacts of changing your dwelling coverage vary by carrier. However, in an analysis of homeowners insurance rates available from five major companies in Florida, QuoteWizard discovered that the average annual cost of insurance for a home with a $325,000 dwelling limit was $262 more per year than the cost of insuring a $275,000 home.
Based on this data, the unnecessary $50,000 in coverage would cost about $22 a month.
While this is undesirable, it is less severe than the potential financial hit of being underinsured by $50,000.
|Dwelling limit||Average annual premium||Average monthly premium|
|Note: Average rates are based on non-binding estimates obtained from Quadrant Information Services for policies offered by Allstate, Florida Farm Bureau, Nationwide, State Farm and Travelers.|
How do I calculate my home’s replacement cost?
No one can truly know their home’s replacement cost until it’s time to rebuild, but here are steps you can take to come up with an accurate estimate.
Provide your insurance company with accurate details about your home
Most insurance companies use home valuation software that analyzes key characteristics of your home to estimate its replacement cost. These programs work best when the insurance company has accurate information.
In an article published by the International Risk Management Institute, Kurt Thoennessen, a certified advisor of personal insurance, lists the most critical data points these systems need to accurately estimate a home’s replacement cost:
- Type of foundation (crawlspace, basement, etc.).
- Type of construction (frame, masonry, masonry veneer, etc.).
- Roofing materials and type of roof (gabled, flat, hip, etc.).
- Siding materials and type of siding.
- Is the home built on a slope, and, if so, how steep is the slope?
- Total living area, in square feet.
- ZIP code.
- Number of stories and nonstandard wall heights, if any.
- Interior features and finishes, including walls, flooring and cabinetry.
- Age and type of heating and air-conditioning.
- Year built, and, if applicable, year when last renovated.
- Garage size and type (attached, built-in, etc.).
You can usually look up your home on your county assessor’s website to find most of these details. However, if you or a prior owner have renovated the home recently, the county’s information might not be up to date.
If you have recently purchased your home or are finalizing a purchase, you’ll also find most of this information in your inspection report.
Ask about the dwelling limit shown in your quote
If you are shopping for insurance, the dwelling limit shown in your quote should match your home’s replacement cost. As you review quotes, make sure to ask how the agent determined your dwelling limit and correct any inaccuracies they may have.
Research local construction costs
An easy way to come up with a ballpark estimate of your home’s replacement cost is to find the cost of residential construction per square foot in your community. Then multiply this figure by your home’s total living area. Local construction industry groups often publicize this information, which can make it easy to find online.
Since these estimates are based on average homes, you’ll need to adjust this average for your home.
If, for example, the cost of building homes in your community is $200 per square foot, the replacement cost of a typical 1,000-square-foot home will be about $200,000. However, if your 1,000-square-foot home has custom cabinets and floors, or ornate construction features, your replacement cost might be closer to $250 to $300 per square foot, or $250,000 to $300,000.
Hire an insurance appraiser
Hiring an appraiser to determine your home’s replacement cost provides a more scientific estimate of your home’s replacement cost. Unfortunately, this could set you back a few hundred dollars or more.
A licensed appraiser has the training and resources to provide an accurate estimate of how much it would cost to rebuild your home, based on its construction style and materials, plus local labor costs.
Bear in mind that a replacement cost appraisal is usually different from the appraisal that a lender requires for a mortgage. The latter typically determines a home’s market value.
What is extended and guaranteed replacement cost?
Most insurance companies offer extended replacement cost coverage as either an endorsement or built-in policy feature. Extended replacement cost increases your dwelling coverage, usually by 10% to 25% of your home’s replacement cost value, if the cost to rebuild exceeds your policy's dwelling limit.
Some insurance companies offer guaranteed replacement cost coverage. This covers the entire cost of rebuilding your home, no matter how much doing so exceeds your dwelling limit.
Considering the uncertainties in estimating a home’s replacement cost, features such as these can prove extremely valuable, especially when they are offered at a reasonable price.
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