The Difference Between a Home Warranty and Homeowners Insurance
What’s covered under each, plus common pitfalls to avoid
Insurance and a warranty may SOUND like they're the same thing. But there are important differences to keep in mind, especially if you want to avoid paying out of pocket, if and when disaster strikes. Here's how to understand the risks and benefits of each option.
More of a reader? Catch the video transcript below!
What’s up guys, Brent the Broker here, and today we’re going to be talking about homeowners insurance and home warranties. What’s the difference? When do you need which? What does it cover?
What is a home warranty?
Simply put, a home warranty covers you in the event that mechanical systems break down appliances. It’ll cover some roof leaks, some electrical and plumbing issues, and things of that nature.
You may be asking, “do I need a home warranty?”
The problem that I have with home warranties is that there’s a ton of fine print that makes it very hard to get them to cover issues. Theoretically, if your dishwasher breaks, you would call the home warranty company, pay around a $50-100 deductible, and they would send a repair tech out.
Now, in my experience, it’s not that easy and a lot of issues aren’t covered. Honestly, I just don’t recommend them. I don’t do an extended warranty on my car, I don’t get extended warranties on the electronics I buy, and I don’t get warranties on my home.
In fact, from what I understand, for every dollar that you spend on a warranty, only a small percentage gets paid out in actual claims. Every dollar that you spend goes to commissions, overhead profit, sales, and things of that nature - that’s why every company wants to sell you a warranty for everything.
What is homeowners insurance?
Homeowners insurance is exactly what it sounds like. It works just like car insurance: if your home needs repairs, you’ll pay a deductible, and the insurance company will come in and cover the rest of the cost of the repair.
For example, after six months or so after buying a home, we had a water main leak. It wrecked the floors, cabinets, drywall, and bathroom. This caused $20,000 worth of damage, but we only paid a deductible of around $2,500.
A homeowners insurance policy is there to cover you in the event of catastrophic losses such as floods, fires, and burglaries. Also, if someone gets injured on your property and decides to sue you for medical costs, the insurance policy may cover that.
As always, check with your insurance broker to make sure you understand your policy’s coverage.
How do I get homeowners insurance?
Typically, your lender will require that you have homeowners insurance before they’ll fund the loan. If they loan you, say, $500,000 using the home as collateral, and then it burns down, they now have a $500,000 loan out against a piece of dirt rather than land with a house on it. So, they require insurance to make sure that their collateral is protected.
Even if you don’t have a loan, it makes sense to get homeowners insurance. It’s typically only a hundred or so bucks a month, and it’ll cover you in the event of something catastrophic happening to your home.
Pro Tip of the Day
This brings us to our pro tip of the day, which is this: make sure you are reading your insurance policy closely. Understand what your deductible is and what your coverages are, and make sure that there’s enough coverage to build the home back up in the event of a fire, flood, or another catastrophe.
Also, if you do an addition to your house, make sure you go get more insurance because the insurance typically covers the rebuild cost of the house.
Another pro tip: there are some things that homeowners insurance doesn’t cover. For example, earthquakes are a real threat in California, but homeowners insurance doesn’t cover that. Make sure to research the area that your home is in and find out if you need any additional types of insurance, like earthquake insurance or sinkhole insurance, for example.
That’s it for me today, guys! See you in the next one!
Brent Edwards (aka Brent the Broker) is a residential real estate agent and Realtor in San Diego, CA who helps clients buy and sell homes in San Diego, California and all surrounding areas. Brent is a highly-recommended Realtor in San Diego by family, friends and past clients. Call Brent today at 619-550-8070 if you have any questions about real estate in San Diego or you'd like to buy or sell a home.
