Home Replacement Cost vs Market Value

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 rebuild them.

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 the land and your home along with other features such as landscaping or swimming pool.

How is home replacement cost related to insurance premium?

The main factor in determining homeowners insurance premium is how much to insure the replacement cost of the home. This coverage is known as the dwelling coverage and it is one of the six main coverages of 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


Personal Property Coverage


50% of dwelling coverage

Loss of Use Coverage


25% of dwelling coverage

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 of individual components listed above.

For example, there are several options of roofing materials such as shingle, metal, or tile. With flooring, there are options such as carpet, hardwood, slate, ceramic tile, and 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. 

How do insurance companies determine home replacement value?

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.

Home Listing Services

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

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.

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 to keep up with any potential cost increase. 

In circumstances where a major disaster struck an area and caused widespread damage to homes, resulting in sudden surge in costs, most insurance companies have additional financial protection in place called extended coverage. 

Extended coverage is an endorsement on homeowners policy that extends dwelling coverage limits by a percentage, usually 20%, 25%, or even up to 40%. This endorsement will cover cost overruns and provide additional funds as needed to rebuild the home. 

Every insurance company has its own guidelines for policies. We always recommend talking to your own agent to discuss your personal policies in detail. Working with a personal agent is the best way to make sure you have the right coverages that fit your individual needs.
How Can We Help?

AYAO Insurance
12700 NE 124th St #9
Kirkland, WA 98034

Alice Yao
WAOIC #716776