Most first-time home buyers understand they need to obtain homeowner's insurance. Many mortgage lenders require insurance because it underwrites repairs to a home's structure, which is essential to their investment.
Home warranties, however, are optional and entirely for the benefit of the homeowner. Many homeowners like them because they put a limit on how much they will have to pay to fix or replace a key appliance or system in the home.
Home Warranties Cover Items That Make a Home Livable
Home warranties cover repairs to systems and appliances inside the home that make it livable. Consider an air conditioner that breaks during an Arizona summer or a refrigerator that stops working. If the item or system can't be fixed, the warranty covers replacement costs.
Many people who buy a home warranty are struck by the similarities to medical insurance. Like medical insurance, there's often a choice of plans. Many home warranty companies offer three: one for appliances, one for systems (HVAC, plumbing) and a combination plan.
Warranty companies contract with repair professionals who are called upon to fix or replace a covered item such as an electric outlet, dryer or busted pipe. It's not unlike physicians who work with certain health plans. Homeowners pay a deductible for each repair and nothing more.
In contrast, most plumbers and electricians charge a service fee just to come to a home. Some will deduct the fee from the cost of labor and supplies, but a deductible is often less than the total cost of a plumbing or electrical job.
Without a home warranty, replacing appliances and systems is even more expensive than repairs. We did a quick search online and discovered:
- A new central air conditioner costs between $3,700 and $7,000
- A new refrigerator with a top-mounted freezer can cost up to $600; the least expensive models are around $325
- A new top-loading washing machine costs about $300 and up, and new dryers are about the same
Homeowners Insurance Covers Structure and Possessions
Homeowners insurance covers a home's structure and the possessions inside like clothing and furniture. Policyholders can add special insurance for specific high-value items such as artwork and jewelry.
An important decision is whether to buy a replacement or market value policy. A replacement policy will restore a home to its original condition before damage. Some policies allow homeowners to insure for less than 100 percent replacement, but this isn't recommended.
A market value policy is based on the amount a buyer would pay for a home in its pre-damage condition. People who choose this kind of policy should pay attention to changes in home values and material and labor costs to make sure they have enough insurance if values go down or labor and materials soar.
First-time homebuyers should shop carefully for homeowners insurance. Most will cover damage from wind, fire, hail and lightening. Floods and earthquakes, though, are rarely covered in a standard policy but may be available under separate arrangement.