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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.

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Key takeaways
  • Home replacement cost is the total amount required to rebuild your home to its original standard.
  • Your dwelling limit must be at least 80% of your home's rebuild value to be fully covered.
  • Home replacement cost can be calculated by multiplying your area's average per-foot rebuilding cost by your home's square footage.
  • Replacement cost is not the same as market value.

What is replacement cost coverage?

Replacement cost is the full amount it costs to replace or rebuild your property. This differs from your home's market value, which incorporates a number of other factors. The primary parts 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.

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.

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. ACV is rarely used for dwelling coverage, and is much more commonly used for personal property. Because of their more limited coverage amounts, actual cash value policies are typically cheaper than replacement cost policies. 


Home replacement cost calculator

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. Say that you have a 2,000 square foot home. If local building costs average $100 per square foot, then you would be looking at a replacement cost of $200,000. Below is a simple formula to follow:

Home sq. ft.  x  local rebuild cost sq. ft. = RCV

Your area's local rebuild costs can usually be found on the websites of local construction companies or by reaching out to a contractor yourself. Determining your own rebuild costs may not be the most accurate method, but it will likely be on par with the amount provided by your insurer in your initial quote.

Find the average per-foot rebuilding cost for your area and multiply that by your home’s overall square footage.

Other ways to calculate home replacement cost

Below are a few other methods to assist you in determining your home's replacement cost.

Insurer appraisal
Insurer appraisal

Home insurers have their own methods for calculating home replacement value. Many use software by insurance analytics companies such as Verisk to generate a replacement cost value for your address when you get your initial quote. These estimates are typically in the ballpark, but may not be as accurate as in-person appraisals.

Online appraisal tools
Online appraisal tools

There are a number of free or subscription-based tools available online that can aid in finding your home's replacement value. However, while these calculators typically use a number of location-based metrics, these tools are often quite limited in scope and may not be as accurate as other means of appraisal. Still, they can provide another point of reference to ensure that your rebuilt costs are at least generally in the right area.

Professional appraisal
Professional appraisal

To get the most accurate estimate, consult a local appraiser who can give you a more in-depth assessment based on your property’s unique features. Appraisers and contractors are likely to have a better sense of local ordinances and building costs, and can do a more thorough job of inspecting your home.

Zebra tip: know the difference between RCV and market value


While replacement cost is related to rebuilding costs, your home's market value is the price that it would fetch 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.
house with blue roof

How does the 80% rule work in homeowners insurance?

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.

 

The 80% rule in action:

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). However, suppose the home is only covered at $150,000. In this instance, the insurer will only 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).

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 for limits carried below the replacement cost. 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.


How to calculate the value of personal property for home insurance

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. 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

Zebra tip: Try to get RCV coverage for your personal belongings


Replacement cost for your personal property is increasingly common for many homeowners policies, and covers your belongings at the full cost to replace them. While ACV is rare for dwelling coverage, some homeowners insurance policies still only replace your personal property at actual cash value, which factors depreciation into your final payout. 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. If you want to ensure your belongings are fully covered, contact your insurer to see about upgrading your coverage to RCV.

 

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
List and photos

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. 

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RECENT QUESTIONS

What companies insure mobile homes with extra build-ons?

You should have no trouble getting mobile home insurance to cover your home including the add-ons, and there are several companies that will insure that type of home. You will need an HO-7 homeowners policy that specifically covers mobile homes.
Jul 4, 2019 Zeeland, MI

Is my deck covered by my homeowners policy?

Since the deck you recently had built is attached to your home, the structure should be covered under the "dwelling" portion of your homeowners insurance. If the deck were not attached to your home then it would be covered under the other structures portion of your policy.
Jun 7, 2017 Salina, KS

How do you establish the cost of replacement for homeowners insurance policies?

Similar to how individual companies have different underwriting methods to determine rates, every insurer figures their replacement cost for a home differently. Some use tax records, mortgage info, average property values, and other data.
Jun 15, 2020 Albuquerque, NM

Can the home owner be sued if their tenant caused damage to someone else?

No, the driver/owner of the car would be held responsible. If you have uninsured motorist coverage, you can have the damage to your car covered and you can file a claim on your homeowner's insurance for the damage to your garage door.
Jan 22, 2019 Seattle, WA

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Ross MartinManager, Content Quality

As a licensed insurance agent, Ross researches and writes insurance content intended to help users make informed decisions.

Ross's background is in writing and education. He holds a master's degree from Royal Holloway, University of London.

Ross's work has been cited by The New York Times, Investopedia, The Simple DollarThe BalanceCar and Driver and Fox Business. He has been quoted by CNET, I Drive Safely and Kin Insurance

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