Home Insurance vs. Home Warranty: What's the Difference?

Home insurance and a home warranty pay for different failures. If you’re already a homeowner, you know that things break.

Insurance covers sudden damage from an outside event, like a fire, a storm, or a break-in, and your mortgage lender will require it. A home warranty is an optional one-year service contract that covers repairs on appliances and systems that stop working, and it costs $500 or more a year plus a service fee every time you call. Where the two leave a gap is wear and tear, which is often where claims get denied.

What’s the difference between home insurance and a home warranty?

Homeowners insurance and home warranties offer two different types of coverage. They’re also structured differently.

What does home insurance cover?

A standard homeowners insurance policy usually includes several general coverage types.

Coverage isn't a single list. On most policies, damage to the structure is covered unless the policy names your cause of loss as an exclusion, while your belongings are covered only for causes the policy does name.

According to the Insurance Information Institute, named causes typically include:

• Fire
• Smoke
• Lightning
• Windstorms
• Hail
• Explosions
• Riots or civil commotion
• Damage caused by vehicles or aircraft
• Theft
• Vandalism

Flood, earthquake, or sewer backup won’t be covered by a standard policy. You’ll need to purchase additional policies or endorsements for these. Damage that builds up over time, like a slow leak or a roof at the end of its life, rather than a sudden event, may also be excluded.

Read your policy’s exclusions and covered events pages, and ask your agent which it is you’re being quoted.

‍How your homeowners policy pays.

‍A policy typically pays a covered claim in two ways. Replacement cost pays to repair or replace with materials of a like kind and quality, with no deduction for age. Actual cash value subtracts depreciation first, so a 15-year-old roof pays out as a 15-year-old roof.

Neither is based on what the home would sell for. Check your policy’s declarations page for which basis applies, and ask your agent if you aren’t sure.

What does a home warranty cover?

A home warranty is a service contract that typically covers replacements and repairs on items like appliances and air conditioning systems. What’s actually on the list varies a lot by contract. D.C.'s Attorney General warns that warranties may exclude kitchen appliances, water heaters, plumbing, and furnaces, and that most don't cover structural defects, well pumps, or septic tanks.

A home warranty might duplicate coverage you already have through a manufacturer’s warranty. What’s more, some service contracts only cover part of a product, or make repairs hard to actually get. Before you buy, compare the contract’s list against what’s still under warranty on your appliances.

‍A home warranty isn't insurance. It's a service contract. That's not a technicality: Insurance pays you for a loss, while a service contract is a company's promise to arrange a repair, on its terms, up to a cap it sets.

Be wary of sales pitches claiming a warranty works like insurance. If a pitch leans on that comparison, read the contract twice.

How much does each cost?

Now let’s break down the cost difference between a home warranty and home insurance.

Homeowners insurance

What you pay each year depends on your area, your property’s details, your claim history, and your coverage limits. Average premiums on 2024 policies ranged from $1,396 in the Northeast to $1,818 in the Southeast, according to the National Association of Insurance Commissioners.

If you do file a claim, remember that you’ll have to cover your deductible before your insurer pays their share. Most home insurers offer a minimum deductible of $500 or $1,000.

Home warranties

The cost can vary based on the warranty provider and the specifics of your contract. A basic home warranty generally costs $500 or more per year, according to the Office of the Attorney General for the District of Columbia. You may also have to pay a separate fee for every service call, which can be around $75.

Read more >> How Mortgage Lenders Influence Insurance Requirements

Do you need both home insurance and a home warranty?

If you have a mortgage, you can expect your lender to require homeowners insurance. This reduces their risk and ensures that your property is protected. Fannie Mae, the government-sponsored enterprise that buys home loans from lenders, coverage equal to the lesser of the full insurable value of the structure or your loan balance, as long as that's at least 80% of insurable value. It also requires that claims be settled on a replacement cost basis, so actual cash value policies aren't accepted on loans it buys.

Home warranties are optional, so whether you need one or not will depend on your financial situation and risk tolerance. If you have new appliances or home systems, they may be covered under manufacturer warranties. Looking there first could prevent you from buying duplicate coverage. But if you have older appliances or home systems, a home warranty might provide peace of mind and be worth the cost.

‍Your credit is a rating factor, though not a credit check

‍Most states let home insurers price your policy partly off a credit-based insurance score. That's not the score a lender pulls, though both come from the same credit report, where payment history counts for the most.

Maryland bans credit in homeowners pricing outright. Oregon and Washington allow it with limits: It can't be the only reason you're declined, a thin file can't count against you, and a policy can't be canceled or refused renewal over it. Your state insurance department can tell you how it works where you live.

How home insurance and home warranties affect homebuying

If you’re in the process of buying a home, homeowners insurance will play a very real role. That’s because your mortgage lender will want to see proof of coverage before finalizing your home loan, according to the Consumer Financial Protection Bureau.

On top of that, you’ll likely need to prepay a year of premiums as part of your closing costs at or before closing. This money is held in an escrow account, and a portion of every monthly payment is directed there as well. When your home insurance bill comes due, your lender uses your escrow account to pay it on your behalf.

Home warranties are not required, so they typically don’t have a major impact on the homebuying process. If you do opt for one, you can arrange for it privately. Most newly constructed homes and remodels include a builder warranty that typically covers permanent home elements like:

• Plumbing
• Electrical work
• Concrete floors

Read more >> How to Reduce Closing Costs When Buying a Home

Bottom line

Home insurance pays when something sudden damages your home, and your lender will require it. A home warranty is an optional service contract on specific appliances and systems. There’s a fee for each visit and a cap on what it pays — for example, you may only get $1,600 to replace a $12,000 boiler. It's worth pricing against the age of what it covers.

Credit shows up twice when buying a home: once in the mortgage rate, and once in how most states let insurers price a premium. And payment history is the biggest input into the report both numbers come from. Kikoff's Credit Account adds a payment to that report every month and reports it to all three bureaus. Plans start at $5 a month.