You are on the journey toward buying your first home – congratulations! Yet, before you dot all the i’s and cross the t’s, your realtor is asking you questions about whether you want any financial tools to protect your investment.
After all, you will be spending hundreds of thousands of dollars over the next few decades to own your very own piece of land; you want some financial help to keep that investment safe.
Your lender requires you to acquire home insurance before your deal can close, and your real estate agent is likely encouraging you to seek a home warranty in the purchase contract. Home insurance and home warranties seem like similar financial tools – because they are.
However, there are critical differences in how these tools protect you and your home, and understanding those differences will help you determine what you need.
What Is Home Insurance?
Home insurance, also called homeowners insurance, is a type of financial protection against damage to your home as well as the people and items within your home. Insurance always covers the interior and exterior of the structure of your home, such as the roof and the walls, and most policies will cover all personal property inside the home as well as critical systems like heating and cooling.
Different home insurance policies will protect against different types of damage, or “perils”. Some examples of perils include fire, smoke, theft, vandalism, tornado, flood, and earthquake.
However, it is important to note that insurance protects you against unforeseen damage, like a tree limb crashing through your roof during a storm or a cracked pipe in the wall flooding your kitchen. If damage occurs due to negligence or lack of maintenance, your insurance might not cover you.
Likewise, insurance typically doesn’t cover the source of the damage; if your water heater explodes, your policy might help you fix the walls and floors, but it probably will not pay for a new water heater.
Usually, you need to provide proof of insurance before you can be approved for a home loan – you should talk to mortgage lenders in Charlottesville, VA to be sure if this rule applies in your unique situation. Even if your home loan does not require insurance, it is a critical financial tool to have. You can find home insurance quotes online, but as you shop, you should look for a policy that will cover the full replacement of your home, should the worst happen.
What Is a Home Warranty?
If insurance is protection against the unknowable dangers to your home, a home warranty is a protection against the known and inevitable damage your home will sustain. Over time, the systems in your home naturally degrade. You must perform routine maintenance to keep systems in good working order, and even then, your systems will eventually need to be repaired and replaced. Home warranties help you pay for necessary repairs and replacements on critical systems, potentially including heating and cooling, large appliances, plumbing, septic, and pools.
Home warranties are excellent for use in tandem with home insurance because they will often cover the cause of damage in the home. Using the example above, a home warranty will not cover the damage caused by an exploded water heater, but it will pay for the replacement of that water heater. Thus, when you have both insurance and a warranty, you can limit your out-of-pocket expenses.
Home warranties are not required elements of a home purchase, but they are often provided by sellers of older homes who need to give buyers extra incentive to close on a purchase. You can talk to your real estate agent about the potential of adding a home warranty policy to your home offer or negotiating for one before your deal closes.
If you are not offered a home warranty by your home sellers, you might wonder if it is worthwhile to purchase one on your own. Homes built within the last 10 years generally do not benefit from a home warranty as their systems are new and likely in working order, so you only need to consider acquiring a home warranty if you are buying a property that is about 15 years older or more. Then again, if you are quite handy and capable of managing your maintenance, repairs, and renovations, you might not find home warranties to be worth the price.
Conclusion
A home is a serious investment, and the right financial tools can help you protect that investment into the future. You should talk to your real estate agent, your lender and anyone else involved in the transaction about home insurance, home warranties and any other financial product you believe could be of use.
