If you are planning to buy a home, you will come across the mortgage specialist or your real estate agent talking about home insurance and home warranty. You may wonder what the difference between the two is.
As a first-time home buyer, it is natural to be confused between the two terms since they both safeguard your investment and will protect your money if something goes wrong. However, both are different types of policies and offer distinct protection. It helps to know what they cover and then decide if you need one or both.
Understanding home warranty
Let us understand what a home warranty is and what it covers. A home warranty is nothing but a service contract that will help pay for the repairs or replacement of the household appliances and systems that are covered under the contract. You have to make a monthly or annual fee payment for the same and you will then enjoy a flat rate on the service calls you to make.
A home warranty works in a simple and straightforward manner. Whenever an appliance or a system covered in the plan breaks down, the warranty company will send a technician to fix the issue. You will only have to pay the service call fee for the same.
However, the plan comes with a coverage limit and if you have received the warranty as a part of the home purchase, your coverage will begin as soon as you close on the home. You can also buy a home warranty for a house you already own.
What does your home warranty cover?
A home warranty will cover the systems and the appliances in your home. It is available in three different types of plans- an appliance plan which covers the dishwasher, refrigerator, or washer and dryer, the system plan which covers the electrical and plumbing systems and a combination plan which covers both.
If you have heavily invested in the systems and appliances, you might want to opt for the combination plan. That said, you are free to add coverage for additional items which are excluded from the standard plans.
For a home warranty, you have to pay an annual or monthly fee which will depend on your place of residence and the plan you buy. You will also have to pay a service fee which is the amount you pay every time you request repairs to the system or appliance.
Understanding home insurance
Home insurance, as the name suggests is property insurance that will protect you against the damages or losses that are caused by the covered perils. A policy can cover the damage to the structure of your home, your personal belongings, additional living costs, and liability protection.
Some of the most common perils include smoke, theft, riot, lightning or fire, explosion, damage caused by vehicles or aircraft, falling object, freezing of the plumbing, etc.
You can find the complete list of perils in the home insurance policy document. It will also cover the personal liability for the injuries caused to other people while they were on your property. Some of the common liability claims include home accidents, dog bites, injured domestic workers, falling trees, or intoxicated guests.
Most policies will not cover the losses or damage caused by earthquakes or floods and based on where you live, you can buy a separate policy for the coverage.
The cost of your home insurance will depend on where you live, the cost of rebuilding the home, the cost of your personal belongings, the deductible you choose, etc. If you have a dangerous dog breed, it will affect the premium and could increase them significantly.
Now that you have an answer to the question: home warranty vs home insurance, it is up to you to decide whether you want home insurance, a home warranty, or both.
A home warranty will help cover the costs whenever a system or appliance breaks down while home insurance will cover the home as well as the personal belongings against theft or any other perils. Most mortgage lenders do ask for a home insurance policy so this is something you will have to budget for if you are buying a home.
On the other hand, a home warranty is optional and completely your choice but it can provide peace of mind and an additional layer of protection. It makes sense to have a home warranty if you have expensive systems and appliances that are not covered by a standard warranty.
If you think that the cost of replacement could be expensive, consider investing in a home warranty. Always read the fine print of the policy so that you are aware of what is included and what is not. This will ensure that you do not get any surprises at a later stage.
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