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Homeownership comes with a whole host of advantages. It’s more cost-effective than renting in the long-term, it’s an opportunity to build equity, and it gives homeowners the freedom to make any changes they’d like.
But all of these benefits come at a cost. Homeowners need to continuously maintain their home and fix repairs, like a leaky roof or a broken AC unit. This is where home warranties and home insurance come into play.
In this article, we’ll highlight what these two types of insurance offer, the major differences between them, and what’s covered so you can make the best decision.
What is Home Insurance?
Most people purchasing a home are already familiar with home insurance since most mortgage lenders require it. Let’s break this policy down first and then we’ll review what a home warranty is so you can see how they differ.
You can take out a home insurance policy from an insurance company (many of which offer various forms of insurance, like auto and life insurance).
A home insurance policy offers financial coverage in the case of an accident or natural disaster that involves your home, like a hurricane or a fire that damages your property or personal belongings. It may also come with liability coverage. This would cover medical bills or legal fees if you’re responsible for an injury at your home.
Here’s a breakdown of what’s typically covered under a standard policy:
- Dwelling - This covers damage done to your home and attached structures like a balcony or porch. It’s common for standard home insurance policies to cover enough for you to rebuild your home if needed.
- Other structures - This includes other standalone structures on your property, like a shed or a fence. The policy coverage amount is typically 10% of the dwelling damage.
- Liability - This includes coverage if you accidentally damage your property and/or if you injure someone. The policy coverage amount is typically between 50%-70% of the dwelling coverage.
- Personal liability - Includes the repair or replacement of personal belongings that have been damaged or stolen in a “covered” event, which is usually a natural disaster. The policy coverage amount is typically 20% of the dwelling coverage.
- Medical payments - If someone is hurt at your property (whether it’s your fault or not), this will cover the medical payments. The policy coverage amount is typically between $1,000-$5,000.
Types of Home Insurance Policies
There are a few types of home insurance policies, so let’s start with the most popular: HO-3 Insurance.
HO-3 Insurance
Most mortgage lenders will require homeowners to have at least this level of home insurance, which is why it’s the most common.
An HO-3 policy will generally cover damage to your property from anything except what the policy specifically excludes, like a flood.
Home insurance companies offering HO-3 will typically cover the 16 “named perils”, including hail, smoke, fire, lightening, theft, vandalism, falling objects, riots, and explosions, to name a few. Anything beyond these would require extra coverage.
HO-5 Insurance
HO-5 offers more extensive coverage than the HO-3 policy. Just like HO-3, HO-5 will cover damage to your property from anything except what the policy specifically excludes.
Where they differ is personal property. HO-3 only covers named perils, which are those specifically listed in your policy. HO-5 covers any peril and you’ll get the replacement cost of the item.
HO-1 and HO-2 Insurance
If HO-3 is considered “standard” and HO-5 is considered “premium”, HO-1 and 2 are your “basic” policies with limited coverage.
This type of insurance will only pay out for damages caused by specific issues listed in the policy. Often, this isn’t enough coverage for mortgage lenders, making it the least popular option.
Cost of Home Insurance
You’ll find that the costs for home insurance vary depending on a few things, but namely on the state you live in and what kind of coverage you want.
For example, the average annual premium from home insurance companies in Oklahoma is $4,445, which is on the high-end. On the low-end is an average annual premium of only $499 in Hawaii.
This price disparity is based on how prone the location is to have natural disasters. Prices are higher in Oklahoma because it’s a state that's at high risk of various perils, like tornadoes, hailstorms, wildfires, flooding, and earthquakes.
Pros
- Covers major damages due to natural disasters and accidents
- Peace of mind
- Can compare quotes easily online
Cons
- Doesn’t offer coverage for flooding
- Doesn’t
- Low deductibles come with high monthly premiums
What are Home Warranties?
While home insurance covers damage and loss due to natural perils, like a fire or a hurricane, home warranties, on the other hand, covers the cost of repairs and replacements of certain household systems and appliances due to everyday wear and tear.
Here are a few items that home warranty companies will commonly cover:
- Heating system
- Electrical system
- Plumbing system
- Dishwasher
- Plumbing stoppage
- Built-in Microwave
- Garbage disposal
And the list goes on, but it will vary depending on the company and the home warranty plans they offer.
Typically these companies will offer multiple plans that offer varying levels of coverage.
Choice Home Warranty, for example, is one home warranty company that offers coverage for all of the items listed above in their Basic plan, but they offer even more coverage in their Total Plan, like AC system, refrigerator, and clothes washer and dryer.
They even have more coverage options that you can add-on to any plan, like pool/spa, second refrigerator, well pump, and more.
When it comes to home insurance, most lenders will require an HO-3 policy, which is why it’s the most popular option. With home warranties, on the other hand, there’s more flexibility to choose any plan that best suits your needs.
With home warranties, the pricing is also a bit more straightforward. You can get a quote online and the price for a specific plan which will usually only fluctuate based on the size of your home.
Home insurance companies, however, have more factors involved that affect rates, like location (you’ll pay more if you live in a state more prone to natural disasters), age of your home and materials, past claims you’ve filed, and even your credit score.
Select Home Warranty is one company that even offers a signup perk of $100 off for the year or two months free.
Pros
- Convenience. When something in the house breaks or needs to be replaced, a home warranty will cover the costs.
- Peace of mind
- Plans are affordable
- Coverage flexibility
Cons
- You have to pay service call fees, which can range from $50-85
- Not everything is covered and reading the fine print is essential to find out what exclusions and limits there are with home warranty companies.
- Usually doesn’t cover accidents and negligence
- There are coverage caps
- You usually only use a contractor from the home warranty company network
Final Thoughts
Most mortgage lenders will require you to take out an HO-3 home insurance policy at minimum. In other words, there's no need to contemplate whether or not you should buy into it if you’re planning on purchasing property.
A home warranty, on the other hand, isn’t required by anyone—not by law nor lenders. Nevertheless, it’s worth having for the peace of mind and convenience it offers homeowners.
So what’s next?
Start comparing rates online to find the best home warranty companies and home insurance companies that suit your needs.
Article Topics
Home warranty
Jessica Cotzin is a writer and the Lendstart authority on small businesses and personal loans. She has been writing about personal finance and the loans industry for a number of years, and holds a bachelor’s degree in journalism from Florida Atlantic University.
