Do I Need a Home Warranty If I Have Homeowners Insurance?
Home warranties on the other hand are basically a service contract that typically covers appliances and mechanical systems in your home like this broken oven.
Buying a home is a big deal, it often represents the biggest purchase a person makes in their life. When you have that kind of money on the line you want to make sure you protect your investment. When it comes to your home, there are a couple of ways to protect it. Homeowners insurance and a home warranty both work to protect your home but they work in different ways and understanding their differences is important.
What Homeowners Insurance Covers
Homeowners insurance is an absolute must and will be required if you have a mortgage on your home. Even if you own your home outright, unless you can easily afford to rebuild it and replace all of your possessions, a homeowners policy is a necessity.
Homeowners insurance is designed to safeguard your home from damage or destruction that is caused by a specific set of perils. While covered perils can vary by insurer, most standard insurance policies cover damaged caused by the following:
- Fire and smoke
- Lightning strikes
- Windstorms and hail
- Explosion
- Vandalism and malicious mischief
- Damage from an aircraft, car or vehicle
- Theft
- Falling objects
- Weight of ice, snow or sleet
- Water damage
It should be noted that a standard homeowners policy will not cover flood damage, you need a flood insurance policy if your home is in a high-risk flood area.
Homeowners insurance covers the exterior and interior of your home as well as your personal possessions up to the covered amount. It also provides liability coverage in the event someone is injured on your property and decides to sue.
Homeowners insurance is designed to cover damage from sudden and unexpected events such as major storms or accidents. It does not provide protection against everyday wear and tear.
What a Home Warranty Covers
Home warranties on the other hand are basically a service contract that typically covers appliances and mechanical systems in your home. These warranties will repair or replace specific items in your home if they break down.
Coverage varies by warranty but in most cases the following would be covered by a home warranty:
- Plumbing
- Electrical
- Heating and cooling systems
- Refrigerator
- Stove
- Oven
- Dishwasher
- Garbage disposal unit
- Washer and dryer
You may also be able to extend coverage to your swimming pool and hot tub but these are usually an added fee. Home warranties are contracts that usually last for 12 months but can be renewed. Fees vary but expect it to start around $400 and go up from there.
Cheaper polices offer less protection and often require some out of pocket costs such as a service call fee, More expensive plans offer more robust coverage and smaller service fees. Home warranties are not required by a mortgage lender like homeowners insurance and are strictly optional.
What’s the Difference Between the Two?
The big difference mainly comes down to appliances and the mechanical systems of the house and when they are covered. While a homeowners insurance policy will pay to replace your appliances and mechanical systems if they are damaged or destroyed by a covered peril such as a fire or tornado, it will not pay our for everyday wear and tear or a simple breakdown.
Homeowners insurance is meant for sudden and unexpected damage while a home warranty will cover more routine damage or breakdowns. As an example, if your fridge suddenly stops working (and a tornado or other storm is not involved) a home warranty should cover the cost of the repair or replacement of it while a homeowners insurance policy wouldn’t provide any coverage.
The Pros and Cons of a Home Warranty
There are numerous pros when it comes to home warranties but there are also plenty of cons.
Pros:
- It provides peace of mind that if your appliance stops working and needs to be repaired or replaced it will be fixed without causing you financial hardship. This can be a big comfort if your appliances or the mechanicals in the house are old.
- The warranty company will handle finding a repair technician and dispatch them to your home saving you the time and trouble of searching for a company to come out and fix the problem.
- Typically the service fees are pretty low, especially when compared to the cost of repairing or replacing the appliance or mechanical system. In many cases, the first year of a home warranty is paid for by the previous owner of the home, the developer or your real estate agent.
Cons:
- Most warranties come with maximum payouts for specific repairs or replacements. As an example, a warranty may limit coverage of an HVAC system to $2,000, which may not be enough to cover the repair or replacement of the unit.
- There may be extra fees for hauling away an old appliance or other systems.
- They may deny coverage if they feel that the unit in question had a pre-existing condition, was improperly installed or not maintained and serviced on a regular basis. You may need to provide service records and in the end coverage may be excluded.
- You have very little if any say in the service provider being used to repair or replace your appliance or mechanical system. Home warranty companies use specific service providers and you typically cannot choose another one.
- These contracts can be filled with exclusions and pre-conditions so make sure that you read the entire contract carefully.
Do I Need a Home Warranty?
The truth is that it is a personal decision and there is no right or wrong answer. A home warranty can absolutely provide peace of mind and help cover the cost of expensive repairs or replacements that will never be covered by a homeowners insurance policy.
However, many experts also believe that home warranties often come with too many exclusions and subjective technicalities, which can make getting repairs or replacements difficult. In addition, you have no say in who provides the service or if a replacement instead of a repair is necessary.
In most cases, a home warranty makes little sense for a new build unless it is a gift from the developer or realtor. If you are financially secure enough to cover the cost of repairing or replacing an appliance or mechanical system after a breakdown, a home warranty is probably unnecessary.
However, if the cost of a repair or replacement would be a major financial burden then a home warranty may make sense but make sure you do your homework and read the contract in full taking note of any exclusions.
Properly maintaining your appliances and mechanical systems and having them serviced on a regular basis can help prevent costly repairs or complete breakdowns, making a home warranty less necessary.
Read the Contract
If you are considering a home warranty, you should do the following:
- Read the contract and its fine print in full and ask questions about anything you do not understand. Make sure that you are crystal clear on what is covered and what’s not. Make note of exclusions or any language that could be used to deny a claim.
- Make sure that you completely understand any obligations on your part such as regular servicing of the components and any documentation you may have to provide.
- Investigate the service providers covered by the warranty and make sure they are reputable, bonded, insured and licensed. The warranty company should be able to provide you with a list of approved service providers. If they can’t look for another company.