Replacement Cost: The cost it would take to rebuild your home from from scratch. This figure includes factors like similar materials, degree of craftsmanship, roofing costs, exterior features, heating/cooling systems and more. Non-material costs are considered as well, including the costs of permits, fees, debris removal, contractor labor, overhead and profit.
Market Value: The cost you paid for the house at the time you bought it. This is calculated by factors such as neighborhood, home values around you and the real estate market.
Scenario 1: You bought a 5,000-square-foot home on Water Street in Elmira and paid $40,000 for it. A few years later, the house is destroyed in a fire. The replacement cost to rebuild a 5,000-square-foot home is going to be a lot more than the market value you paid at the time of purchase.
Scenario 2: You bought an 800-square-foot cottage on Seneca Lake and paid $300,000 for it. A few years later, the house was destroyed in a fire. The replacement cost to rebuild an 800-square-foot home is going to be significantly lower than the market value you paid because of where the house is located. Your insurance policy will only rebuild your 800-square-foot cottage with similar features to the original, which will be significantly less than the $300,000 you paid to purchase the property. Insurance is for the home and not the land. In this scenario the original purchase price included the land value and not just the home.