Home Replacement Cost vs Market Value

Home Replacement Cost vs Market Value

One of the most common questions we get during homeowners insurance review is:

What is the difference between home replacement cost and market value?

Here in the Greater Seattle area, we have one of the most sought-after real estate markets in the nation. Because of this competitive market, the market value of our homes can often be significantly higher than the cost to replace them.

Home Replacement Cost

Is the estimated cost including labor and material to rebuild a home back to its original condition prior to an insurance claim.

Market Value

Is the market price of your property including both value of the land and value of any improvements on the land, such as your home, landscaping, or other features.

How is home replacement cost related to insurance premium?

The biggest factor in determining homeowners insurance premium is the replacement cost of dwelling, which is the main structure of your home and all other structures attached to it. This coverage known as the dwelling coverage is one of the six main coverages of a homeowners insurance policy

Dwelling coverage is also the main component that determines the coverage limits of other coverages, such as personal property and loss of use coverage. 

Here is an example:

Dwelling Coverage

$500,000

Personal Property Coverage

$250,000

50% of dwelling coverage

Loss of Use Coverage

$125,000

25% of dwelling coverage

How is the home replacement cost determined?

Our process starts with research on a home using these three main sources:

County Website

Home Listing Services

Home Appraisal
(if one is current)

County Website

Through the local county website database, your insurance agent is able to identify some basic information such as the year built of your home and total square footage.

These are some of the main components used to estimate your home replacement cost.

Home Listing Services

Home listing services such as MLS can provide information such as type of flooring, roofing material, etc.

These information are helpful when your insurance agent is preparing for a homeowners insurance quote.

Home Appraisal

If this is a new purchase, your insurance agent may also reach out to the loan officer to obtain a copy of the residential appraisal report for the most updated information about your home.

After the initial research, we will reach out to the homeowner and confirm the accuracy of the information from these sources. During this conversation, we will also inquire if there has been upgrades or recent changes that were made to the home. 

In the final step of the process, we will enter the data of the home into our internal system, and the system will provide the estimated replacement cost of the home.

What are the factors used to determine home replacement cost?

Here is the list of the major rating factors that are used:

Building Info

Exterior Features

Interior Features

Building Info

  • Year built of the home  
  • Total square footage  
  • Style of home (single or two story, split level or tri level etc.)
  • Presence of basement vs no basement 

Exterior Features

  • Exterior wall materials (wood siding, vinyl siding, stucco etc) 
  • Age of roof 
  • Style and material of roof
  • Size of garage 
  • Number of exterior doors and windows

Interior Features

  • Number of bathrooms and kitchen 
  • Style of bathrooms and kitchen
  • Type of interior flooring 
  • Style and materials of Ceiling and wall 
  • Number of fireplaces and type of fireplace 
  • Type of heating and cooling systems in the home
  • Any special amenities (such as an indoor pool or spa) 

Each category may also have additional options to specify quality and build grade for individual components of the factors listed above.

For example with roofing materials, there are options to select shingle, metal, or tile. With flooring, there are options for different types of carpet, hardwood, slate, or ceramic tile etc. 

If there are upgraded interior or exterior features

Such as recently renovated cabinets and countertops in the kitchen or a converted garage from carport, they should all be included in the submission. The more details we are able to capture and input into the system, the more accurate the home replacement cost estimate will be. 

It is important to have an accurate home replacement cost in order to determine adequate coverage for the homeowners insurance policy and be financially protected for the full value of the home. 

What if I want more coverage than the replacement cost?

In the situation where the estimated replacement cost seems lower than expected or if you simply wish to increase your coverage, there are a couple of options available:

Request to increase the coverage limit

For most insurance companies, you can choose to insure the dwelling coverage up to 150% of calculated home replacement cost.

Increase the extended coverage limits

Extended coverage is an endorsement on homeowners policy that extends dwelling coverage limits by 20%, 25%, or 40%.

How this endorsement is included on a policy varies by different insurance companies.

Some companies include this endorsement automatically at a fixed percentage, and provide options at higher premium for customers who may be looking for even higher percentage limits. 

Other companies only offer a fixed percentage and do not have options for higher extended limits. In this scenario, you may only increase the total coverage limit by adjusting the dwelling coverage limit. 

Construction worker is using the hand saw to cut lumber | Home Replacement Cost Estimate

Does replacement cost update over time?

Replacement cost can fluctuate from time to time. The two main cost factors are:

Cost of Materials

Labor Costs

Most major insurance companies design their homeowners policies to automatically include an inflation adjustment at every renewal. Beyond inflation, there could also be disruption in costs due to surge in demand as a result of major disasters that caused widespread damage to homes in an area. 

This is also the reason why most homeowners insurance policies include the extended  coverage to account for potential cost overruns.