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Replacement Cost Estimator: How to Calculate Home Replacement Costs

Replacement cost plays an important role in homeowners insurance. Getting an accurate estimate of the replacement cost of your home will allow to correctly size your dwelling coverage.

Read Time: 8 mins

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There are a few different ways that a homeowner can estimate the replacement cost of their home. While no estimation is completely accurate, each form of calculation will provide an estimation that will be in the ballpark, with some being more accurate than others.

There are many factors that go into determining the replacement cost of a home such as square footage, number of bathrooms, and other localized costs. Homeowners insurance companies will use their own estimator to determine how much coverage they think you need to have to be able to rebuild your home completely, but you can also run your own estimations to determine what amount is right for you.

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Key facts
  • There are a few different ways to estimate home’s replacement cost including some simpler formulas and some more complex ones. Some insurers even have their own calculators.
  • There are different levels of replacement cost coverage that a homeowner can choose to pay a premium for.
  • Estimates are just that. Costs that factor into an estimate are changing on a daily basis as the world changes. Actual replacement costs can vary dramatically from what was estimated.

What is replacement cost in home insurance?

Replacement cost is essentially how much money it would cost to repair damage to some or all of the home using the same materials as was used originally. Estimating or knowing the replacement cost of your home can help you obtain the proper amount of home insurance to fully protect your home. If it is estimated that the cost to rebuild the home is $250,000 then the homeowner should purchase a home insurance policy that has a dwelling coverage limit of $250,000.

It is important to note that the actual cost to repair or rebuild a home when damage occurs, may differ from what the estimated replacement cost is or what the replacement cost determined when the policy was bought equaled.

How to calculate the replacement cost of a home

How can the replacement cost value actually be estimated? There are a few different ways that this can be done. The first way and the way that will be used by the insurance company, is the number that is estimated using their replacement cost estimator tools. This calculation will take into account your application along with any other pieces of information that the insurance company can find on your home.

DIY calculation

The quickest and simplest way that a homeowner can estimate their replacement cost value is by multiplying the square footage of the home by the cost per square foot to rebuild in the homeowner’s local area. Why not? Doing the calculations yourself spares you from the expense of hiring a professional appraiser. If you choose to trust your wit in doing the computations, here are some facts that can help you arrive at the magic number:

  1. Get in touch with your local builder and find out about the prevailing cost of building per square foot. Multiply it by your floor area.
  2. Secure accurate information about the cost of the same materials used in building your home. Find out how many floors tiles, roof panels, wood moldings, plaster, and other materials cost and have a good estimate of the needed quantity.
  3. Do not forget to include an inventory of your personal possessions and their cost as you do your estimate.

Here is this replacement cost estimator example. Say the square footage of the home is 2,500 sqft and the cost to rebuild in the local area is $100 per square foot. In this case, the replacement cost estimate would equal $250,000. 

Online replacement cost calculator

In today’s world, homeowners can use home replacement cost calculators online to get similar estimates that an insurance company might have, because the calculators will take into account a lot of the same factors as those that the insurance company uses.

There is a good number of online cost calculator tools that you can use free of charge. Similar to doing DIY calculations, an accurate inventory of the specific materials, the needed quantity, and the value of all your personal possessions will be necessary. When using an online cost calculator, the accuracy of your list determines the accuracy of your number.

Appraisal by a 3rd party inspector

The most expensive option but probably the most accurate option as well, is to hire a licensed appraiser to inspect the home. They will be able to provide an educated detailed estimate of the rebuild cost of the home.

Usually, your prospective insurer will send their own appraiser or will subscribe to the services of a professional contractor to get the job done with the highest level of accuracy. While this method can give the most reliable value, it pays to keep in mind that he/she is a representative of your insurer who will protect their best interest. If you can go by your insurer’s own appraiser, then it’s perfectly fine. But if you need to have their numbers verified for your peace of mind, hire your own appraiser.

A 3rd-party inspector will provide you with broad insights into the information you need. He/she is very likely to have thorough information about the cost of materials and labor from many locations, including your own. Although hiring your own appraiser will cost you an amount, your peace of mind on the information they provide will surely prove its worth.

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What factors impact a home’s replacement cost estimate?

There are a number of factors that can be taken into account including:

  • Square footage
  • Number of rooms
  • Interior features
  • Ages of the home
  • Roof and foundation type
  • Renovations and additions

This list is not exhaustive. The more factors are taken into account the more accurate the estimate.

Replacement cost value and market value

The replacement cost value and market value of a home can be vastly different numbers. While the replacement cost is how much it would cost to rebuild your home to the same standard it was before the damage occurred, market value is what you could sell the home for on any given day. Buying your home insurance policy based on the home’s market value could potentially leave you widely over or underinsured.

Actual cash value versus replacement cost value

There are two basic forms maximum coverage limits can take in a homeowner’s policy. The first and lesser coverage form is the actual cash value. This form of coverage factors in depreciation over time to the replacement cost value. For instance, say the home’s original replacement cost value is determined to be $250,000 and the calculation for depreciation of the home over time is $10,000 per year. Ten years go by and damage occurs to the home. At this point in time, the maximum coverage limit that the insurance company would pay out would be $150,000 ($250,000 – ($10,000 *10 years)). The actual cash value can lead to significantly lower coverage for the homeowner over time. Purchasers of older homes are strongly encouraged to purchase replacement cost value coverage and not actual cash value coverage. 

Replacement cost value coverage is just like actual cash value coverage but does not factor in depreciation over time. In this instance, if the home’s replacement cost value is originally determined to be $250,000 and ten years go by at which time damage occurs. At this time the maximum coverage limit that the insurance company will pay out will still be $250,000 even ten years later.

Other forms of replacement coverage

There are even more comprehensive replacement cost value coverages available to a homeowner. Of course, these more comprehensive coverages come at a more expensive price. Two common options available to a homeowner are extended replacement cost and guaranteed replacement cost.

Extended replacement cost

Extended replacement cost is the next level up from replacement cost value reimbursement. Usually, the extended replacement cost extends the replacement cost coverage to 125 or 150% of the replacement cost value. For example, if the replacement cost value of the home is determined to be $250,000 and the homeowner purchases extended replacement cost coverage to 150%, the homeowner’s maximum coverage limit would be $375,000. This coverage can help the homeowner in the event of rising rebuild costs over time due to increases in materials or other costs.

Guaranteed replacement cost

Guaranteed replacement cost is the most comprehensive coverage. When a homeowner purchases this maximum coverage limit, they are guaranteed to be reimbursed for whatever the actual replacement cost of the home ends up being. For example, say a home is determined to have a replacement value of $250,000. Some years go by and damage occurs, completely destroying the home. Repair costs have risen dramatically, and it is determined that it will take $500,000 to rebuild the home. The homeowner will be able to have the entire $500,000 reimbursed by the insurance company even though the replacement cost value was only half of that, thanks to guaranteed replacement cost coverage.

Summary

Utilizing a replacement cost estimator can help you get on the right track for determining just how much home insurance you need to fully protect yourself in the event that a catastrophe happens. While some estimators are more accurate than others, they all can provide the homeowner with an estimate in the right ballpark. Of course, actual replacement costs are always changing as materials, labor costs, and other factors are constantly changing.

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ABOUT AUTHOR
Kyle has extensive background in financial planning and financial writing. He is an expert in home, auto and life insurance. Kyle holds a Bachelor's degree in Business Administration from San Diego State University and multiple financial planning designations.
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