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You need to figure out your home’s replacement cost in case your home is destroyed by a disaster and needs to be rebuilt. Homeowners insurance will pay for the repairs, up to your coverage limit, which should match the replacement cost of the home. 

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.

Replacement Cost Formula :

To calculate your home’s replacement costs, multiply the square footage of your home by the local rebuild cost.

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 not always the most accurate. Hiring an appraiser will get you the most accurate replacement cost estimate.

What is the replacement cost of your home?

The replacement cost of your home is the dollar amount that 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. 

Insurers abide by an 80% rule when it comes to replacement costs. They will only cover replacement costs if you purchased homeowners insurance coverage that equals 80% of your home’s replacement value. For this reason, it is vital to get enough coverage. 

How to estimate the replacement cost of a home

There are a few different ways you can calculate the replacement cost of your home:

  1. Hire a licensed appraiser: A local appraiser will inspect your home to calculate how much a rebuild would cost. 
  2. Get an estimate from a replacement cost calculator: Online dwelling replacement cost calculators use the information you provide to estimate how much it would cost to rebuild your home. 
  3. DIY: Multiply the square footage of your home by the local rebuild cost for a rough estimate. You can find local rebuild costs on local construction company websites or from a contractor.

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

Some people may find their dwelling coverage won’t be enough to cover the cost of rebuilding their homes. For example, people who live in disaster-prone areas may find that their rebuilding costs are much higher due to an increased demand for materials after a disaster. 

If there’s a chance you could be subject to fluctuating replacement costs, there are some endorsements to consider adding to your policy.

Replacement cost coverage

This type of 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.

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 limit caps at a 50% maximum of your dwelling coverage but can be less 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 there are newer building codes in your area, 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.
  • Outdoor features: Patios 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.

How to calculate dwelling coverage

The dwelling coverage you have in your policy is what pays to rebuild your home after a disaster. 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. You can calculate it by multiplying your home’s square footage by your local rebuild cost. Rebuild costs are generally given per square foot, but make sure to double-check. 

The 80% rule

The 80% rule is a standard that most insurance companies follow. It states that the insurer will only cover the cost of repairing or replacing a home if the homeowner has purchased at least 80% of the home’s replacement cost. 

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

When it comes to choosing dwelling insurance, there are two main options: actual cash value (ACV) or replacement cost value (RCV). ACV policies reimburse policyholders for the current replacement cost of their home minus depreciation. It means that 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.

Frequently asked questions

Is replacement cost the same as market value?

No. Replacement cost is how much it costs to rebuild your home to its prior condition after a disaster. Market value is how much someone would pay to buy your home.

How do you calculate replacement costs of a home?

To calculate the replacement costs of a home, multiply the square footage of your home by the local rebuild cost per square foot.

Shivani Gite contributed to this story.

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Nupur Gambhir
Managing Editor

 
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Nupur Gambhir is a content editor and licensed life, health, and disability insurance expert. She has extensive experience bringing brands to life and has built award-nominated campaigns for travel and tech. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service.

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