Replacement Cost vs Market Value: Why It Matters in Homeowners Insurance

When you purchase homeowners’ insurance, your policy will show a dollar amount that your insurance company would pay to rebuild your home if it were to become a total loss. You might be wondering: How did we come up with this figure?

This amount is sometimes higher than the home’s current market value, and sometimes, it’s lower. That’s because the amount doesn’t reflect your home’s current market value — it has to do with the total cost to replace your home. Here’s why the difference matters.

What Is Home Replacement Cost?

Home replacement cost refers to the amount of money it would cost to rebuild your home from scratch, using similar materials and construction methods. Your home replacement cost takes into account your home’s square footage, local labor costs, similar building materials, debris removal costs, and architectural style.

For some homeowners, the replacement cost of their home is lower than the market value. This is especially true in today’s market. That’s because the market value takes into account things like the age, condition, location of the property, the land it sits on, etc., while the replacement cost represents the materials and labor required to rebuild the structure.  

What is a Home’s Market Value?

A home’s market value is the estimated amount for which a property would sell in the marketplace. A home’s market value may be influenced by recent sales of similar properties in the area.

How Replacement Cost vs Market Value Affect Homeowners Insurance

There may be times when your home’s replacement cost is higher than its market value. For example, a cold real estate market could lower what buyers would be willing to pay for your home. Or, if you have an older home that needs a lot of repairs or updates, buyers may be willing to pay less for it.

Sometimes, the market value may be higher than what it would cost to build your home from scratch. This can be the case in hot real estate markets where inventory is low and demand for homes is high, regardless of condition.

In either case, it’s important to know the market value AND the cost of replacement in the event of a total loss. This will protect you from being underinsured and not getting enough compensation to rebuild your home when it’s most critical. It also prevents you from being over insured and paying more for homeowners’ insurance than you really need to.

You can get a replacement cost estimate from a local appraiser who is familiar with the current construction market. Our insurance companies can also offer an estimate for home replacement cost to ensure you get proper coverage amounts.

Both market value and replacement cost can fluctuate over time, depending on the economy and things like inflation. It’s always a good idea to review your insurance policy each year to make sure you have enough coverage in case of a total loss. At Younger Insurance, our annual policy review process helps keep things current and with today’s times. At Younger Insurance Agency, our agents connect you with multiple insurance providers to help you right-size your coverage. Contact us today for a quote!

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