Do you as a homeowners know the difference between a homeowner's insurance policy and a home warranty? There is a distinct difference between the two. As a homeowner, it's important to know what differences there are and how each type functions. With the increase in home values over the last couple years, you have a bigger investment to protect against hazards and defects.

Homeowner's Insurance Policy

A homeowner's insurance policy is critical in regard to homeownership. In fact, in most cases it is required by mortgage lenders, and you may not be able to qualify for a mortgage without it. According to an article on the National Association of Realtors website, "Homeowners insurance is what is known as a "package policy" - this means it covers both actual, physical property and legal responsibility for injuries that happen on that property." The article also states, "Homeowners insurance policies generally cover destruction and damage to a residence's interior and exterior, and loss or theft of possessions, and personal liability for harm to others."

There are three common types of homeowner's insurance coverage which include actual cash value, replacement cost, and guaranteed or extended replacement cost. Most homeowner's insurance policies do not cover natural disasters such as flooding, earthquakes, hurricanes, and the like. Some companies have insurance riders that can be purchased to cover some of these natural disasters. You will pay an annual premium for your homeowner's insurance. The cost of homeowner's insurance varies by location, size of the property, age of the property, and the property's history. There are also different levels of deductibles as well. For example, you may have a $1,000 deductible that you must pay first before the insurance company will pay the rest on a claim.

Home Warranty

A home warranty is completely different coverage than a homeowner's insurance policy. First of all, it is not required. However, many real estate professionals and homeowners recommend obtaining a home warranty if your home is older or has systems, functions and appliances that may start to need repairs or begin failing soon. According to Choice Home Warranty, "A home warranty is a service contract that helps protect homeowners against the cost of unexpected covered repairs of their major systems and appliances that break down due to normal wear and tear." The average cost of a home warranty is approximately $450-$700. This depends on the level of coverage you choose.

Most home warranty companies have three levels of coverage such as basic coverage, medium coverage and ultimate coverage. The plans are for annual coverage and can be renewed each year. Some companies offer discounts for multiple years of coverage. Many home warranty companies will not let you use the plan for at least 30 days after purchase of the plan. This is because some may want to purchase coverage after something in their house breaks. The way a home warranty works is that if something in your home breaks you would need to call the service number. The company will assign a contractor to come look at the problem and repair or replace it. The homeowner will then pay a service fee, which is comparable to a deductible. Service fees are typically around $100. Then, the home warranty company will cover the rest of the contractor's bill.

Home values have risen considerably over the past few years. Your lender wants to protect the investment they have in your home by requiring a homeowner's insurance policy. You should consider protecting the equity in your home by choosing a home warranty. The less you have to pay for repairs and replacements out-of-pocket, the more net money you retain of your home's worth. They both work together to cover damage to your home.