When purchasing a new home, it’s important to understand the difference between home insurance vs. home warranty. If you're trying to figure out where to start when you want to buy a house, one thing you'll need to understand is how to best protect yourself and your investment if anything were to go wrong. Many of our clients mistake home insurance and a home warranty to be one and the same - but, there is a difference! So, let’s take a look at what those are today.
What is Home Insurance?
Photo by Suparerg Suksai from Pexels
Homeowners insurance pays for any accidental damage and loss caused by fire and storm damage like lightning strikes, windstorms, and hail. It also covers the replacement of personal property in case of theft or fire. Finally, It covers damage and liability if a person were to get injured in your home or on your property. However, damage from earthquakes and floods is typically not covered, so a separate policy for those items would be needed.
When you apply for a mortgage, lenders are typically going to require you to obtain a home insurance policy before approving your application for buying a home. Make sure to keep in mind that each type of coverage in the policy is subject to a limit and, in most cases, you will have to pay an insurance deductible. Homeowners insurance policies are typically renewed annually and the average annual cost for a policy can range between $300 and $1000 according to home insurance provider American Home Shield.
How Does Home Insurance Work?
Photo by Kelly L from Pexels
In the event of an accident or natural disaster, the homeowner contacts the insurance company to file a claim. As long as the incident is covered under your chosen policy, you'll receive a check for the replacement cost after paying your deductible. Deductibles can range anywhere from $100 - $2000 depending on your policy. So, whether you're a first-time buyer or not, it pays to do your homework and compare quotes and deductibles from different insurers as those can vary.
Just keep in mind that the higher your deductible, the lower your yearly premiums will be, so the balance will be whether you want to pay more upfront for lower deductibles or the other way around.
What is a Home Warranty?
Photo by ready made from Pexels
A home warranty plan is designed to cover the cost of repairs and replacements of major appliances and systems that may fail or break due to normal wear and tear. This includes, but isn’t limited to, HVAC systems, electrical systems, or plumbing components, kitchen appliances, and your washer and dryer. With a home warranty, you have the option to pay premiums year-round or to pay it in full.
While homeowner’s insurance is obtained upon purchase of your home. You can purchase a home warranty at any time during your ownership, but having a warranty is another way to protect yourself and your family from costly repair bills to home systems that aren't covered under your homeowners' insurance policy.
How Do Home Warranties Work?
Photo by Karolina Grabowska from Pixels
The best way to explain how a warranty works is with an example:
You wake up one morning and discover that your toilet is leaking water all over the bathroom floor. You'll file a claim with your home warranty company and they'll send out a qualified contractor to assess the issue.
If a simple repair is needed for the toilet, those repairs will be made as long as they're covered under your service contract. If the toilet is beyond repair and at the end of its effective life, the toilet will be replaced completely for only the service call fee or another amount determined by your warranty coverage.
Homeowners will typically pay a yearly premium between $300 and $600 for their warranty. The companies that provide warranties usually offer different warranty plans to provide coverage on all or just some of your items and you can customize your coverage with added options for additional coverage.
Make sure to keep in mind that there are coverage limits set by your home warranty provider. For instance, in the case of the leaking toilet - the repairs and replacement of the toilet is covered but any structural damage to the floors would not. However, the water damage should be covered under your homeowners insurance policy.
What's the Difference?
While both help to cover the costs of unexpected events in your home and they both have yearly or monthly premiums and deductibles, there are differences. Homeowners insurance deductibles will usually be higher than the warranty's but the biggest difference you'll see is in the types of coverage each provides:
- Homeowners insurance does not cover damage caused by malfunctioning systems or appliances while a home warranty will.
- Home warranties won't cover structural damage due to fire and storms or personal property loss due to theft or fire while a homeowners insurance will.
- Homeowners insurance is required by mortgage lenders before a mortgage will be approved.
- Home warranties are not required before the purchase of a home (or at all for that matter) and can be purchased at any time during the ownership of the home.
Do You Need Both?
Photo by Tima Miroshnichenko from Pexels
As a reminder, you'll need insurance as one of the requirements of a mortgage application, but it's not required that you have a home warranty.
With that being said, we always recommend our homebuyers have both. The combination of home warranties and home insurance coverage provides protection on many of the expensive replacements or repairs that can occur during the ownership of your home. Although there are premiums and deductibles involved in the cost of obtaining these, the protection you receive provides an additional financial safety net. This in turn is one more thing that will allow you to fully enjoy your new home and have peace of mind.
We hope this information helped to clear the two homeowner policies up for you. But, as always, if you have additional questions, feel free to leave them in the comments below or call or email us today. We're always happy to help.
Charleston's Best Home Team