Difference Between Dwelling Replacement Costs & Home Value

The term dwelling replacement cost is an insurance term and refers to insurance coverages that are sufficient to replace your home (aka dwelling) if it burned to the ground or was completely destroyed in some other way. This includes replacing everything including contents of the home. However, replacement cost may not be the same as the real estate market (selling) value of your home.

Replacement Cost

Insurance companies provide coverage on homes based on the cost of replacing them at the same quality as they currently exist. This is determined using a formula that factors in square footage of heated and cooled space, as well as the unheated or cooled square feet. Replacement cost per square foot depends on the quality of the home, as determined by an appraiser.

Example: The replacement cost of a home is determined to be $100 per square foot, so an 1,800 square foot house would cost $180,000 to replace the heated and cooled portion of the home. But the unheated areas also must be calculated. This would include garages, porches and basements. The cost per square foot would be less to rebuild these spaces, as determined by the appraiser. These different costs to reproduce the home are totaled, and the sum represents total replacement cost.

Home Market Value

The market value of homes is determined by real estate appraisers, who search neighborhoods for sold homes that are similar in quantity and quality to your home. They select a minimum of three comparison homes, then assess the differences of each one, comparing specific areas. They perform a series of weights and balances of values based on number of rooms, bedrooms, bathrooms and other pertinent aspects. They ultimately determine the value from the market sales of the other homes, with the sale price within the range of the comparison homes. Market value can be lower or higher than your cost to replace the home.


Many homeowners discover that replacement cost as shown in their homeowners insurance policy may not be enough to replace their homes if they burned down. This can happen in just a few years. What seemed reasonable when the home was purchased is no longer adequate. The rising cost of lumber, steel, labor and gasoline are driving up building costs.

Contents Coverage

Replacement cost of the dwelling should extend to (and cover) replacement cost of contents of the home. This is important for larger, expensive homes where coverage for replacement of art, jewelry and high-end furnishings and electronics is needed. Inadequate coverage leaves homeowners having to pay money out of pocket.


Insurance policies that contain the clause "guaranteed replacement cost" are disappearing. This represents full replacement coverage of a home if it is destroyed, and allows for a growing percentage of increase in replacement amounts each year at the same premium cost to the homeowner. This is being replaced by "extended replacement coverage," which gives coverage based on policy limits, plus 20 to 30 percent, and nothing more. This may not be sufficient to cover your total cost to replace your home if it is destroyed. Those who have insurance with a guaranteed replacement cost clause may be notified of a change to extended replacement coverage.


About the Author

Joey Campbell spent eight years in real estates sales and property management. She has been active in residential and commercial mortgage for the past 23 years in the Southeastern U.S. Campbell has attended hundreds of seminars, and has written and conducted workshops on subjects such as credit, debt excelleration and prequalifying for residential mortgages.