Two types of coverage can protect you from the unexpected after you buy a home. Homeowners insurance, which covers you for vandalism, theft and certain disasters, and a home warranty plan, which pays for certain items in your home if they break. Homeowners insurance is required when you have a mortgage and is an essential protection for any homeowner. It allows you to rebuild should a storm or fire destroy your biggest asset. A home warranty isn't a necessity, but comes in handy and saves money when things start to give out around the house.
Homeowners Insurance: Why You Need It
Your mortgage lender or bank has a huge financial interest in the state of your home. Bad weather, a burglary or a major pipe burst can have a devastating affect on your home's condition, its value, and in turn, the bank's investment in your property. To protect its interests, the bank requires you to take out a minimum amount of homeowners insurance coverage upon mortgaging your house. The portion of the homeowners insurance policy that your lender is concerned with is the "hazard" coverage. "Homeowners" and "hazard" insurance are often used interchangeably to describe this type of insurance coverage.
Your lender checks your homeowners insurance policy periodically to ensure it's up to date and sufficient. Your lender can not only obligate you to buy a homeowners insurance policy, but it can purchase one for you if you let yours lapse. This force-placed homeowners insurance is often the result of failed attempts by the lender to get you to pay your insurance on time. Force-placed insurance may lead to an additional monthly payment added to your mortgage to cover the cost of the new insurance policy.
Mortgage lenders make a good case for requiring homeowners insurance, but having a mortgage isn't the only reason to get this coverage. Even if you own your home free and clear, you may not have the funds – or wouldn't want to use your own funds – to rebuild your house or cover any other loss that your home suffers in a catastrophic event. Even the most modest of homes would cost several tens of thousands of dollars to rebuild from the ground up if lost in a fire. Further, your other belongings would also need to be replaced, which homeowners insurance does. A lender requires you to insure your home based on its replacement cost, or the cost to rebuild it. This is a good rule of thumb to follow even if your home isn't mortgaged.
An often-overlooked coverage that's included in a homeowners policy is liability insurance. Liability coverage pays your legal fees and the cost of a settlement if someone is injured on your property and sues you. It can also extend beyond your property and cover you if you're sued for something that happens away from home.
Home Warranty: Why You Want It
You may not need a home warranty if you're exceptionally handy or have a tried-and-true list of tradespeople who charge only a small fixed fee every time. Otherwise, buying a home warranty every year makes a lot of sense. A home warranty charges an annual fee plus a nominal service or "trade call" fee every time it pays to fix something in your house.
One of the major benefits of having a home warranty is the money it saves. A basic plan costs $300 and can cost up to $600 for upgraded plans. A trade call fee can range between $40 and $70. The annual cost of a home warranty plan is typically less than the cost to replace a major home appliance such as the stove, dishwasher, refrigerator, washer or dryer. With a home warranty plan, all of your appliances could break down in the same year and be repaired or replaced for less than the cost of purchasing a single new appliance.
A home warranty plan also saves a lot of time. Your home warranty provider hires local tradespeople who have already been vetted. The home warranty company is responsible for sending them out to your home and coordinating the repair or replacement of your damaged component. The plumber, electrician, roofer or technician simply evaluates the problem and reports back to the home warranty company. The company then determines whether to fix or replace the broken item. You pay for a home warranty on buying a home but can also buy a plan anytime thereafter. You can renew the home warranty plan every year, if you choose.
Many homebuyers may request that the seller pay for a one-year home warranty plan on closing escrow. Some real estate agents may even offer to pay for the plan if a seller or buyer will not. This adds an additional layer of protection and peace of mind, especially for new homebuyers who don't know what may lie ahead as far as their new home's condition.
A seller, likewise, can also purchase a home warranty plan when selling a home – if they don't have one already. A seller's home warranty plan can cover repairs needed during the listing period or when a home is in escrow. This coverage might appeal to a seller who wants to reassure the buyer that a home is in good condition and to provide a warranty for any work done to the home while on the market.
Whether you're purchasing homeowners insurance or a home warranty plan, the cost varies by:
- Property type
- Size, usually square footage
- Insurance or warranty company
Upgraded or "enhanced" home warranty plans can cost approximately $100 to $300 more than a standard home warranty. While a standard home warranty typically covers built-in appliances such as a stove, dishwasher and microwave, other appliances, such as a refrigerator, washer or dryer are considered upgrades and add to the cost. A standard plan usually covers plumbing, water heater, furnace, electrical and mechanical components, ceiling and exhaust fans. But coverage for a pool or spa, roof repairs, air conditioners and septic systems are typically upgrades and cost more.
The national average cost for a homeowners insurance premium was $1,228 for a $200,000 dwelling with a $1,000 deductible and $100,000 in liability coverage, at the time of publication. States prone to hurricanes, hail storms, tornadoes and earthquakes have the highest insurance rates. For example, Florida and Louisiana were the most expensive, while Hawaii and Vermont were the least expensive, according to one survey by Insurance.com. There are also other variables that don't affect home warranty plans but do affect homeowners insurance premiums, such as:
- Age of home
- Building materials
- Security systems
- Area crime rates
- Homeowner credit score
- Claims history
A standard homeowners insurance policy doesn't cover earthquakes or even flooding when it's due to inclement weather. Earthquake and flood insurance is an additional policy, or "rider" that you can purchase. Depending on where you live, this add-on can be substantial.
- Nolo: What Is Force-Placed Insurance?
- Insurance.com: Insurance Basics for New Homeowners
- HomeWarrantyReviews.com: 21 Frequently Asked Questions About Home Warranty
- Realtor.com: What Is a Home Warranty? Peace of Mind for Home Buyers and Sellers
- Money Talks News: Home Warranties Often Aren’t Worth It: How to Judge for Yourself
- Insurance.com: Average Homeowners Insurance Rates by State
- Better Business Bureau. "Home Warranty Inc."
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.