Your home is one of the most important investments you’ll ever make, so it makes sense that you want to protect it from rooftop to crawl space.
Maybe you purchased a home security system. You might be looking into some security cameras. Maybe a doorbell camera is on your shopping list. That’s all great, but don’t forget to include homeowners insurance in the equation. Home insurance is home security, after all.
But it can be difficult to wade through the jargon to understand what exactly you’re protected from and what might be exposed to risk — especially during the home-buying processes, when you’re dealing with inspectors, real estate agents, and lawyers while signing a million different documents.
Are your possessions protected? What about your appliances? Will you be okay if your home is hit by lightning? What if it floods? Is that covered by the warranty or the insurance? These are all questions you want to know the answers to before fact. The worst position to be in is having to come out of pocket to repair or replace something you thought was covered.
Don’t worry, though. We’re going to clear all this up for you, starting with the differences between a home warranty and homeowners insurance. Let’s begin by defining both.
What Is Homeowners Insurance?
Simply put, homeowners insurance is a policy you purchase from an insurance provider that protects your financial interests if your home is damaged significantly or catastrophically. The vast majority of the time, buyers are required by their lenders to purchase homeowners insurance in order to secure a mortgage.
More specifically, homeowners insurance protects you in six ways. Homeowners insurance covers:
- Your dwelling (your actual home)
- Any structures on your property (like a detached garage or shed)
- Your personal possessions
- The medical costs of individuals injured on your property
- Your legal liability in relation to those injured parties
- Loss of use costs should your home become uninhabitable (i.e., hotel costs)
One important thing to note before we move on is that homeowners insurance does not protect against the everyday wear and tear of your property or possessions. If your washing machine breaks or your fridge stops working, you’re on your own to replace or repair those things.
Of course, there’s a lot more to all this that you can read about in our homeowners insurance buyers guide, but for the purposes of this article, this should give you enough of an understanding of what homeowners insurance is and what it covers to discuss it meaningfully.
Now with that in mind…
What Is a Home Warranty?
A home warranty is an annual service contract you enter into where you pay a set fee to protect yourself from the expenses of repairing or replacing your home’s major appliances and systems, such as refrigerators, washing machines, hot water heaters, and HVAC systems.
FYI: Modern air conditioners will last around 15 to 20 years. Do you know how old yours is? If it’s wearing out, you’re looking at a pretty hefty replacement bill — usually between 5 and 10 grand.
There are tons of different companies out there that offer home warranties, and each offers specific types of coverages. We’re going to get into this later, but very few will give you 100 percent peace of mind, and you’re likely going to have to pay a little something should you need to use your warranty coverage.
You can probably already see where we’re going with this, but here it is spelled out.
What’s the Difference Between the Two?
First, your homeowners insurance is required by your lender. You need to have it. A warranty is totally optional, but your seller might have thrown one in to sweeten the deal.
Next, your homeowners insurance protects you from major damage and catastrophe. If your house burns down, your insurance is going to make you whole again — or at least close to it. Your warranty, on the other hand, will help you repair or replace major appliances and systems as they break down.
FYI: When you’re looking for homeowners insurance, make sure you understand the difference between replacement and reimbursement. The former will pay for a new washer, while the latter will cut you a check for your old appliances’ depreciated value.
There can be a little overlap between the two, but you likely want to use each for its intended purpose. For example, you’re not going to call your insurance agent if your dryer stops working, and you’re not going to call the warranty company if your fridge is damaged in a kitchen fire. Both are tools to protect you, but each is applied in different situations.
Now that that’s clear, let’s talk about the elephant in the room.
How Much Do These Cost?
The short, unsatisfying answer is “it depends.” Your homeowners insurance costs and warranty prices will depend heavily on the value of your home, its age, its location, and the level of coverage you’re after.
The longer answer is that the cost of homeowners insurance in the U.S. is between $100 and $150 per month for an average — $300,000 or so — home. That will get you basic coverage for the six factors listed above and, generally speaking, keep you pretty well protected.
Now, if you’re looking for really comprehensive coverage, that figure could go north of $300 per month, and if you live in a state that providers consider more dangerous, like Oklahoma (tornadoes) or Florida (hurricanes), your prices are going to be even higher.
Pro Tip: If you live in the Sunshine State, there are some special considerations you’ll need to make when shopping for a policy. Check our guide to the best homeowners insurance providers in Florida for more information.
The same goes for warranties. Depending on where you live and what you want to be covered, you can expect to pay between $200 and $1,700 per year, usually broken up into monthly payments. However, you’re also going to pay a $75 to $125 service fee on top of that monthly payment if you need to use your warranty’s protection.
Which leads us well into what we need to talk about next.
How Does a Home Warranty Work?
Let’s say you have an air conditioner that doesn’t seem to be blowing as cold as it used to and that you have a home warranty that should cover it. You’ll call the company to report the problem, and they’ll send a contractor out to have a look. The contractor will then tell the company what the issue is, and if it’s covered, the company will pay to have it fixed. Keep in mind, though, that if it’s not covered, the repair will be on your dime; either way, you’re still going to have to pay the service fee.
FYI: Some people think the lack of choice you have in contractors and repair companies is a drawback of a home warranty, and some think it’s a benefit. You won’t get to select who fixes your toilet, but you won’t spend time gathering quotes either.
While it might offset the immediate costs, you’re never going to be completely without a repair bill with a home warranty. You’re still paying the monthly cost as well as the fee for the contractor to assess the problem.
That might seem like an okay trade-off to you, but let’s dig a little deeper and lay out the pros and cons of a home warranty.
Home Warranty Pros and Cons
- Saving you time: Do you know a good HVAC repair company off the top of your head? If you don’t and you’re sweltering in the summer, the last thing you want to be doing is Googling companies and gathering quotes.
- Protecting you from unexpected costs: If something goes wrong with your plumbing, you could be looking at tens of thousands of dollars to diagnose and repair the problem. If you have a warranty and it covers the issue, you and your bank account are in the clear.
The not so good:
- Only partial coverage: No home warranty is going to cover everything. Even with a great provider, you still run the risk of being denied coverage. This can be for any number of reasons — maybe they say you didn’t properly maintain the hot water heater that went out or that your HVAC system is too old to be included in your plan. The loopholes can come back to bite you.
- Reticence to replace: A lot of home warranty companies would rather repair your system or appliance than replace it — even if it’s on the way out. If it technically can be fixed, they’re usually going to go with that option.
- The cost: At the end of the day, you’re going to be paying every month for a service whether or not you use it. Warranties don’t take away the cost of repairing or replacing things; they simply spread it out.
So if you weigh these two lists against each other, you’re going to come to the same question most folks have.
Is a Home Warranty Worth the Money?
For most folks, it depends. But in our opinion, you’re much better off taking the money you’d spend every month on the warranty and putting it aside in an emergency fund. Once that account is pretty hefty, you can rely on it to repair or replace almost anything that goes wrong in your house. If it’s a massive expenditure that you can’t cover, you have your homeowners insurance to fall back on.
That said, you are going to want to make sure you have robust homeowners insurance. Check out our review of Lemonade to get an idea of what we’re talking about. They offer some of the most comprehensive protections in the market at some of the most reasonable prices.
Getting back to the point, though. Ultimately, the decision to purchase a home warranty will depend heavily on your situation and what you value. If you know that you’re not the type of person that’s going to set aside an emergency fund — and there are a lot more of you out there than there are folks who plan in that way — a warranty might be worth it. It might also be worth it if you bought an older home with older appliances and systems that haven’t been upgraded recently.
FYI: It’s estimated that 56 percent of Americans couldn’t cover a $1,000 emergency expense. If you find yourself in that camp, an inexpensive home warranty might seem like an attractive option. Just make sure you understand the coverages and costs completely before signing on the dotted line.
While it’s impossible to foresee what will be coming down the pike — hey, your AC might give out this summer — a good way to gauge whether or not a home warranty is worth it is to look at all the repair costs you had over the last year. If the total is less than the cost of the warranty you have in mind, you’re probably better off handling things on your own.
Final Thoughts on Homeowners Insurance and Home Warranties
You’re a responsible person. You want to protect your home and be smart with your money. On paper, it seems like having comprehensive homeowners insurance coupled with a robust home warranty is the most surefire way to ensure you’re protected from whatever life might throw your way, but when you start looking at the details, warranties tend to become a little less attractive.
We’re not going to say they are totally without value, but for most folks, home warranties can end up being a waste of money. The peace of mind is nice, but you may be able to achieve the same by building up a healthy emergency fund. Just some food for thought.
The other piece of that peace-of-mind puzzle is robust homeowners insurance. If you’re in the market, be sure to check out our guide to the best homeowners insurance providers on the market today.
Homeowners Insurance vs. Home Warranty FAQs
Yes. Most lenders require homebuyers to carry homeowners insurance as a condition of their mortgage.
Homeowners insurance protects against significant or catastrophic damages, whereas a home warranty covers your home’s major appliances and systems against breakdowns.
It’s difficult to say, but many financial experts argue that home warranties are often not worth the money.
Most home warranties will cost between $200 and $1,700 per year. You’ll also have to pay a service fee that’s between $75 and $125 when you need to use the warranty’s protection.
It’s difficult to nail down exactly how much homeowners insurance will cost since premiums are determined by a huge number of factors, but for an average home in an average part of the country, you can expect to pay between $100 and $150 per month.