How to Calculate the Replacement Cost of Your Home

Home replacement cost definition and basics

A major component of a homeowners insurance policy is your home's replacement cost. Also known as your dwelling coverage limit, this is selected when setting up your homeowners policy and is used to repair or replace your home if it is damaged or destroyed. While it may seem as easy as putting down your home's market value, this simply isn't the case.

Luckily, we've created a comprehensive guide to help you understand how home replacement cost is calculated and what to expect when rebuilding your home and replacing your personal belongings.

Home replacement cost — table of contents

1. What is replacement cost coverage?
2. Is your home underinsured?
3. How to calculate home replacement cost
4. How to calculate the value of your personal property
5. Considerations

What is replacement cost coverage?

Replacement cost is the full amount it costs to replace your property. This differs from your home's market value, which incorporates a number of other factors. The primary portions of a home insurance policy to which replacement cost applies are dwelling coverage and personal property coverage. Dwelling coverage applies to your house and any attached structures — such as fencing or a garage — while personal property coverage refers to your personal belongings. While it can vary by insurance company, your personal property coverage amount is typically a percentage of your dwelling coverage level (usually around 50%). For instance, if your home is insured to a value of $200,000, your personal belongings would be covered up to $100,000.

Most homeowners policies will cover your dwelling at replacement cost value (RCV), which pays for the full cost of rebuild or repair. However, this may not always be the case. If you have an older home — or a home with architectural features that would simply be too expensive to reasonably replace with modern materials — many insurers may not be willing the cover the full cost of replacement. In these cases, you might want to consider an HO-8 (modified) policy.

Because you are in charge of setting your dwelling limits, the limit you choose can impact how your insurer handles your payout. Most insurance companies abide by the 80% rule, which requires you to insure your home up to at least 80% of its replacement value in order to be fully covered. Otherwise, the insurer is not obligated to fully cover damages, only covering them proportionally to your coverage level. Remember: your deductible applies in all cases.

How does the 80/20 rule work in homeowners insurance?

An example:

A home with a replacement value of $200,000 suffers $100,000 worth of damage in a fire. To be fully covered, the home must have a dwelling limit of at least $160,000 (80% of replacement value). In this case, however, the home is only covered at $150,000. While a limit of $150,000 would seem to be enough to cover the $100,000 in damages, the insurance company will only pay out proportionally to the coverage that is carried below the replacement cost.

In this instance, the insurer will cover 93.75% of the damage ($150,000/$160,000). This means that the homeowner will be required to pay the remaining $6,250 in damages out of pocket ($100,000 - $93,750). To avoid paying out-of-pocket, it's vital to have your limits set to the appropriate level. 

Is your home underinsured? How to find out

According to Nationwide, around 60% of homes in the United States are underinsured. This means that they don’t carry enough coverage to properly replace or repair their home in the event of a loss. When you get a homeowners insurance quote, the insurer suggests a dwelling coverage limit based on the information that you provide, internal data and research by third-party companies. It’s an educated guess and may not be entirely accurate. You can always speak to an insurance agent to find out how they come to their suggested coverage level to see if it seems appropriate for your home.

One way to prevent being underinsured is to enhance your policy with a guaranteed replacement cost endorsement. Guaranteed replacement cost (also known as extended replacement cost) is an option available from many home insurance companies. It can help account for inflation as well as rises in the cost of labor and building materials. Essentially, if your home’s replacement cost ends up being more than your coverage limits, you are still covered to account for these increased building costs. Typically, this will cover expenses between 10% and 25% over your dwelling limit.

Also, don't forget home improvements or additions can increase your home's value and should be incorporated into your home replacement cost. Projects such as adding a patio or finishing a basement may raise your home replacement cost for insurance. Let your insurance company know about these additions as soon as possible to avoid being underinsured.

Home replacement cost calculator tips

A simple way to get a replacement cost estimate for your home is to find the average per-foot rebuilding cost for your area and to multiply that by your home’s overall square footage. This information can usually be found on the websites of local construction companies or by reaching out to a contractor yourself. This approach may not be the most accurate and will likely be on par with the amount provided by your insurer in your initial quote.

To get a more accurate estimate, consult a local appraiser or contractor who can give you a more in-depth assessment based on your property’s more unique features. Appraisers and contractors can have a better sense of local ordinances and building costs. There are also a number of online tools for getting a replacement cost estimate. Many of them use information based on your local area as well as a number of the factors listed in the section below.

Many homeowners may have a hard time separating a home’s replacement cost from its market value, which is the price that your home would fetch if it were put on the market. Market value takes into account factors such as proximity to good schools, crime rates, and the land that your home is built on. Replacement cost does not include such factors. For a better idea of what goes into calculating your home's replacement cost, have a look at the list below.

What factors determine a home’s rebuild cost?

Home replacement cost is the amount of money that it costs to rebuild your home to the same standard that it was before a loss. When calculating the replacement cost of your home, consider the following: 

• Roof type: Your roof can have a major impact on the cost to rebuild your home. Some roof types are built to withstand harsh weather conditions, and therefore may be more costly to replace.
• Local building codes: This can be especially important for older homes, as newer guidelines could make it more expensive to make certain repairs. 
• Foundation type: The type of foundation on which your house sits can be a big contributor to your rebuild cost. 
• Square footage of your home: The average rebuild cost per square foot is one of the primary factors in determining replacement cost. 
• Local construction costs: Construction costs will differ depending on where you live. Consult a local contractor to get an estimate. 
• Outdoor features: Patios and decks attached to your primary dwelling can add value to your home and should be considered in your home's replacement value.
• Home improvements or additions: Major upgrades to your home can add significant value and should be disclosed to your insurer.

How to calculate the value of personal property for home insurance

Personal possessions are typically covered at 50% of your home’s dwelling limit. Keep this in mind when setting up your home insurance policy, and consider increasing this limit if this amount is not enough. Putting together a home inventory is a great way to keep track of the value of your belongings. This is important for both homeowners and renters policies, as it can come in very handy if you suffer a loss.

For higher value personal property, you’ll want to consider a scheduled property endorsement. This applies to items such as jewelry, art and musical instruments. 

Replacement cost vs. actual cash value

The flipside of replacement cost value is actual cash value (ACV). Actual cash value factors in depreciation when considering your payout. While ACV is rare for dwelling coverage, many standard homeowners insurance policies will replace your personal property at actual cash value, though some may offer an option to increase this. Also, if you have a more robust home policy — such as an HO-5 policy — your personal belongings may already be covered at RCV. It’s always a good idea to check your policy documents if you aren’t sure.

Creating a home inventory for insurance

While it can seem tedious, putting a home inventory together for insurance purposes is easier than you might think and can come in handy in the event of a loss.

Follow these guidelines to keep track of your personal belongings:

• Keep an online inventory if possible (or at least store a copy online)
• Start with higher-priced items
• Group items by type
• Take pictures
• Make note of the condition of certain items
• Keep receipts (especially for higher-value items)
• Update your inventory regularly as you accumulate new possessions

Home replacement value considerations

To avoid being caught underinsured, it's important to keep an eye on your dwelling coverage levels. Because of the rate of inflation, this can mean reassessing your home's replacement cost every few years. You can speak with an insurance agent or local contractor to make sure that your replacement cost value is as accurate as possible. If you are concerned about the cost of raising your dwelling coverage level, it may be time to look for a new policy altogether, as you may be about to find more affordable coverage elsewhere. The Zebra can help you get home insurance quotes from a number of top carriers. Simply enter your ZIP below to get started. 

Sources

• Nationwide: Underinsurance