Buying a house is likely the largest purchase you will ever make. The last thing you want is to lose that giant investment in a catastrophe.
This is why banks typically require you to buy a home insurance policy in order to get a mortgage. When shopping for home insurance, you will need to determine the appropriate level of coverage you require based on the replacement cost value of your house.
But if you’re like most homeowners, you might not have much of an inkling as to how you can accurately estimate what the actual replacement cost of your home would be.
HINT: It’s about more than just fair market value or what you paid for it.
What is Replacement Cost Coverage?
Replacement cost coverage is based on an estimate of how much it would cost to rebuild a home of the same size and quality as your current home. Many different elements go into determining the replacement cost value of a home, including construction costs, square footage, building materials, and features of the home itself.
For example, what types of materials were used? Does your home have expensive hardwood, or more affordable vinyl and tile flooring? Do you have an inground pool? What about a double or triple car garage? What about built-in high-end appliances?
As you can imagine, this evaluation can get pretty detailed.
Most home insurance policies cover the replacement cost of the house’s building structure and the actual cash value of your personal belongings inside.
TIP: Updating an inventory of your personal belongings twice yearly (with photos, videos and/or receipts), ensures that your records are always up to date in the event an insurance claim needs to be made.
Replacement Cost Value vs Market Value vs Actual Cash Value
Replacement Cost Value
When shopping for homeowner’s insurance, don’t be too alarmed if you get quoted for a replacement cost value that is less than the market value of your home. Remember, the replacement cost amount is simply the cost of rebuilding the structure of your home, but it doesn’t take into account the property on which your house sits which can be worth a considerable amount itself.
The replacement cost value should equal the amount of money it would cost to rebuild your damaged home to be the exact same house in today’s market.
TIP: Due to the ever-evolving real estate market and economical conditions, the replacement cost of your home may end up being higher, or lower, than what you originally paid for it.
The market value of your home is determined by how much you could sell it for today. This price includes the property value of the home, any improvements made to the land itself such as landscaping, and the cost of the sale, like the realtor’s fee.
If the structure of your $400,000 home is leveled by a house fire, the $100,000 property value of the land on your lot has not been affected. Your home insurance should cover the $300,000 cost of rebuilding your house structure and the personal belongings inside of it. We’ll talk more about how you can estimate an accurate replacement cost further down.
Actual Cost Value
Be mindful of home insurance policies that value your home at the actual cost value (ACV) instead of the replacement cost value (RCV).
While RCV policies will pay to rebuild a house similar to your own in the current market, ACV policies will not cover that full rebuild amount because they account for the depreciation of your home’s structural elements. In other words, if a new roof has a lifespan of about 30 years, the ACV of that roof will go down with every year you live under it.
Most home insurances do use ACV to cover your personal belongings within your home. This may be sufficient for your needs, but it’s worth determining if you would be more comfortable paying more per month to be covered for the RCV of your personal property.
Why It’s Important to Know The Replacement Cost Amount of Your House for Homeowner’s Insurance
You want to know the replacement cost amount of your home as you decide on the appropriate level of dwelling coverage (otherwise known as Coverage A). The last thing you want after a catastrophic event to your home is to discover that you are underinsured and that the policy in place is inadequate to help you rebuild to the standards of your old home.
Let’s say you agree to a Coverage A limit of $200,000 on your home, but it turns out that the true replacement cost to rebuild is actually $275,000. So, if a windstorm or fire destroys your home, your insurance will only pay $200,000 to rebuild and you’ll be left paying $75,000 out of your own pocket to make up the difference.
How to Estimate the Replacement Cost of Your Home
There are a few different approaches you can take to calculate the replacement cost amount of your home. Your best bet may be to use a couple of these methods below and compare estimates to get a fuller picture of what the actual replacement cost may be. It’s safest to choose the highest amount for the fullest coverage, but at the same time, you don’t want to be paying more than you need to for a claim you hope to never make.
Insurance Company Appraisal
Your insurance company will have its own analytical tool for estimating the replacement cost for every house it insures. This technology will use information about your house gathered by you as well as construction costs sourced by the insurance company to calculate a replacement cost.
This method is the simplest and requires the least effort on your part. But, even still, we recommend comparing quotes and replacement costs from a few different insurance companies before committing to one. The more information you can gather, the more confident you’ll be in the coverage you choose.
Online Replacement Cost Calculator
You can also find independent replacement cost calculators online. Tools like Craftsman Building Cost Calculator, My Bluebook, and Dwelling Cost ask you to enter your address and some basic information about your house before they offer you an estimate. But, none of these calculators should be trusted any more than an insurance company. They use similar technology to large insurance companies’ own calculators and tend to offer broad, generalized analyses.
Online replacement calculators rely on the accuracy of user inputs and they don’t necessarily include a fair assessment of the construction costs in your local area. That said, they do offer another point of comparison when researching a fair replacement cost for your home.
Third-Party Professional Appraisal
The best way to get the most accurate replacement cost is to hire a third-party professional appraiser. A professional appraiser is trained and certified in making accurate appraisals. They’ll come in person to your house and thoroughly inspect all the details of your home that go into their analysis. It can be comforting to know you have a trained professional who can offer you a highly qualified opinion on what your house is worth and how much it would cost to rebuild it.
Such a careful examination, however, will cost you a significant fee upfront. Professional appraiser prices can depend on your area, but you can expect an appraiser will cost at least several hundred dollars.
You may choose to go the DIY route and calculate your own estimate. This will definitely be the most costly in terms of time and effort but can be a good educational exercise. If you choose to research the RCA for your home yourself, you will need to calculate the square footage of your house and reach out to multiple construction professionals in your area to get estimates on roofing, flooring, fixtures, siding, plumbing, electricity, and more.
Even if you choose the DIY approach, it is smart to compare your calculations to an insurance company appraisal or online replacement cost calculator. You definitely want to be sure you’re in the same ballpark.
Factors that Can Affect the Rebuild Cost Value of Your Home
The Age of Your Home
Usually rebuilding costs are less than the selling price of a house, but sometimes the rebuilding costs can outpace the market value of an older home. Older homes with intricate details like custom crown molding and detailed plasterwork can be very expensive to replicate. On the other hand, homes built more than 50 years ago often have old plumbing systems and electrical wiring that are worth less than the cost to rebuild properly.
Older homes were often built to different standards. As a homeowner, you are not usually required to upgrade your home to meet current building codes. But, if you make renovations or rebuild a home, you will need to build up to code.
The Size of Your House
The square footage of your house helps form the basis of the replacement cost. All else being equal, larger homes are more expensive to replace than smaller homes.
The Complexity of Your House
The shape and style of your house can affect the replacement cost as well. Unique Victorian-style homes with rounded turrets and bay windows will be more expensive to replace than unadorned, simple rectangular houses.
Features and Finishes
Be sure to take into account any high-end features and finishes of your home. Slate roofs, heated flooring, and custom details will all be expensive to replace.
Your Home’s Fixtures
High-quality fixtures and appliances like granite countertops, custom cabinets, and top-of-the-line kitchen appliances can all greatly affect the cost of replacement.
The Location of Your Property
Where your home was built matters. Location is everything in the world of real estate, and the same holds true if you need to replace your home. Local market conditions can vary dramatically from those in neighboring cities, as can the costs associated with building. Local permits to break ground, taxes, contractors and more can all impact the overall price of replacing your home.
But its not just the state, city or neighborhood that can impact the price. Some homes are built in areas that require specialized accommodations.
For example, if the area is a flood plane, there may be additional costs associated with making sure the newly built home is up to code and capable of handling water. If you live in the south, special considerations regarding hurricane proof windows, doors and roofs can also add to the final cost.
Construction Costs Can Change
Even if you take all of the above into account when estimating a future rebuild cost, construction costs can change with the market. If you lose a home to a major weather event, you may be competing with other affected homeowners in your area to find a contractor who can rebuild your home. Shortages of supplies can also drive up prices.
During the pandemic, there was a notable lumber shortage that affected construction prices for many homeowners. Costs of some building materials over the last year have risen more than 100% (softwood for example has risen 120% year over year).
This is a trend that is expected to continue, due to an increased demand for single-family housing, low-interest rates spurring new property developments, an increased demand for renovations with more people staying at home, and a production shortfall on the manufacturer’s side of the equation.
In the end, estimating the replacement cost of your home is worth requires a fair amount of research and consideration. If the unthinkable were to happen, you don’t want the cost of rebuilding to prevent you from getting your house back.
Ultimately, good homeowner’s insurance coverage is essential for financial health and peace of mind. Religion aside, there is an old saying that asks ‘when did Noah build the Ark?”. Before the flood. Homeowners would be wise to do the same, so to speak, preparing for the worst, but expecting the best. Doing so can ensure that they and their families are well-protected in the event of a disaster or mishap. Looking to read more about this topic? Read our Blog Posts About A Guide to 4 Point Inspections and The 4 Types of House Foundations.