How to Compute the Replacement Cost of a Home

The thought probably never occurs to you when you buy homeowners insurance that you might actually use it for a catastrophic or major event. But that day may come, and it helps to know whether you are adequately covered to replace your home if need be. Here's how to compute the cost of a replacement home.

Instructions

Difficulty: Moderate

1. Determine if you have enough coverage to totally replace your home in the event of fire. This also should include all construction costs. The formula you can use is: square footage of your home multiplied by local building costs per square foot.
2. Talk with your insurance agent on determining how much a replacement home can cost you per square foot. This determines how much to rebuild the structure of your home, called insured perils, and not the amount you bought the house for.
3. Protect your home's structure by having one of three coverages: actual cash value, extended replacement cost or guaranteed replacement. Actual cash value is replacing your home for replacement cost without depreciation. Extended replacement cost is actual cash value including depreciation which is building costs. Talk with your agent to make sure you have a clear understanding of this option. Guaranteed replacement replaces the original home no matter what the cost--no capped dollar amount.
4. Take into consideration that the replacement cost on your homeowners insurance may only be for the purchase price of your home determined by the lender. When the mortgage is paid off, do not cancel your homeowners coverage. You still need protection for your home.
5. Consult your agent to find out exactly what is covered on your homeowners policy. Most policies cover the structure of your home against damage from fire, hail, explosion or theft. The standard homeowners policy does not cover for floods or earthquake damage.
6. Have an appraisal done on the value of the belongings inside your home. Hire a general appraiser to come in and issue a certificate on the value of the belongings inside your home. Keep this certificate in a safe deposit box or somewhere fireproof.
7. Obtain separate policies if you live in flood areas or earthquake areas. Also check with your agent on coverage for mine subsidence. Mine subsidence is when your home was built over a mine and the earth starts to subside, causing cracks in the foundation and general shifting of the home.