As a new homeowner or investor, you may be asking yourself, “are home warranties worth it?” When you’re buying a home, chances are you’ll be offered a home warranty. A home warranty can cover both new and old homes alike. Initially, they sound great — a safety net against unexpected repairs that could otherwise drain your pocket. But do home warranties provide the safety net they promise? Are you a savvy investor? A novice homeowner? Find out if home warranties are worth it to you.
What Is A Home Warranty?
A home warranty is often confused with homeowners insurance, but they’re not the same thing. Insurance covers damage from natural disasters, burglaries, and often water damage.
A home warranty, on the other hand, covers the home’s major components. It will protect your plumbing, electrical wiring, furnace, and HVAC system. Depending on the warranty, it may also cover your appliances, such as your dishwasher and refrigerator. Some policies even cover damage to your swimming pool and its related systems.
Usually, the base plan will cover your home’s major systems. You can then purchase one or more additional riders that cover appliances and other items. It’s important to read the fine print and make sure you know what a policy will cover.
Homeowners insurance doesn’t cover most of these things. And if it does, the deductible for homeowners insurance is high enough that you wouldn’t receive any payout.
Homebuyers will often be offered a home warranty during the purchase of their home. Sellers sometimes offer to include one, since they’re relatively cheap and provide peace of mind to the buyer. You can also expect to get bombarded with ads and fliers for home warranty policies.
Home warranties also differ from insurance in how they provide for your repairs. With an insurance claim, your insurance adjuster comes out and determines how much damage was done. The insurance company then writes you a check for the estimated cost of repairs. You are then responsible for making the repairs.
With a home warranty, the warranty company sends an employee to verify that a repair or replacement is required. If your claim is approved, the warranty provider calls in one of their local service providers to complete the repair.
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What Is Covered In A Home Warranty?
Home warranties are designed to augment your existing homeowner’s insurance. Depending on your insurer and the type of coverage you purchase, most plans will cover your home’s major systems. These are heating, air conditioning, electrical, and plumbing, which includes your water heater.
Add-on coverage is typically available for additional options. You can purchase coverage for washers and dryers, stoves, and other appliances. If you have a pool, hot tub, or spa, there may be options to cover those systems. Septic tank coverage is another common add-on.
Warranties will only cover items that were in working condition to begin with, and they also won’t cover anything that has been damaged due to abuse. Another thing to remember is that some realty firms partner with home warranty companies. This doesn’t mean the warranty your realtor suggests is bad – it could be fantastic! But you still need to do your own research and compare it with different warranties.
How Does A Home Warranty Work?
Home warranties can be purchased on a one-time basis or for a monthly fee. With a one-time warranty, you pay a lump sum upfront, and the home is then warrantied for a specific period. Monthly warranties typically come with a contract term, after which you’ll have to renew.
What Don’t Home Warranties Cover?
We’ve discussed what home warranties cover, but what don’t they cover? It varies from policy to policy, but here’s a short list:
Commercial equipment (i.e. a car lift)
Rust, fading, and other wear and tear
Asbestos, radon, or mold remediation
Structural failures in the building
Damage due to abuse or improper maintenance
Zoning and code violations
Is Home Warranty the Same As Home Insurance?
Home warranties and homeowners insurance plans cover very different things. While a warranty protects against general wear and tear, insurance covers your losses if a fire, theft, or other disasters damage your home and personal belongings. Insurance is typically required, while warranties are optional.
A warranty and an insurance plan operate similarly; you pay for an annual policy with a deductible that must be met before the coverage kicks in. However, the deductible for homeowners insurance is typically much higher. It’s always a good idea to thoroughly review your warranty and insurance plans to know exactly what is covered and what your deductibles are.
How Much Is A Home Warranty?
Home warranty costs vary based on the type of property. A single-family home, for example, is treated differently from a condo due to the associated risk.
That said, square footage rarely factors into the equation unless the home is larger than 5,000 square feet. This makes sense since a large and small house will have the same major appliances, and nobody buys a second dishwasher just because they bought a new house.
The age of the property is another non-factor – at least usually. Very new homes can cost more since they tend to have newer and more advanced appliances.
What does make a difference is the kind of coverage you buy. You can expect to pay more if you add a bunch of riders for appliances or a swimming pool. The most expensive add-on is coverage for a guest house or other second structure. After all, a guest house is likely to have most, if not all, of the appliances in the main house.
With all of that being said, the average policy will cost roughly $600 per year. Just keep in mind that that’s a very rough average.
Besides your upfront payment or monthly premium, home warranties also charge an extra fee when you file a claim. This can range from $60 to $100 and is charged every time someone visits your house for a claim-related reason. If one claim requires visits from two contractors, you may have to pay two fees.
Do I Need a Home Warranty?
Your mortgage lender will never require you to pay for a home warranty. And if the home is brand new, you’re likely to overpay. But if the home’s appliances are starting to show their age, a warranty can be more than worth the investment.
Pros Of A Home Warranty
A home warranty can greatly benefit some homeowners by giving them peace of mind. A warranty protects you when expensive, unforeseen repairs come up. You’ll know how much your premium, deductible, and service fees will cost. You can budget for these set costs in advance, so you’ll be financially prepared when something breaks.
Although building an emergency fund should be at the top of your priority list, not everyone can afford to do so. If you fall into this category, a warranty can provide you with a safety net to prevent you from getting into a deeper financial hole.
Unlike homeowner’s insurance, home warranties protect major appliances as they age. This is especially if you have expensive taste in appliances.
A warranty can also be a huge savior if you aren’t handy or don’t know how to screen and hire contractors. All you have to do is call your warranty company, and they’ll take care of the rest.
Peace of mind
You don’t have to be handy
Cons Of A Home Warranty
Home warranties don’t come without potential drawbacks. First, these warranties won’t always cover absolutely everything in your home. You might find yourself at the mercy of Murphy’s Law and find that your plan doesn’t cover the one thing that breaks in your home.
First, we discussed that home warranties are easy to budget for, which is a benefit. However, on the flip side, this means you’re paying a premium for coverage you might not need.
Even if the plan covers the item, you might be at odds with your warranty company. Many plans include a clause regarding proper maintenance, in which previously covered items lose coverage if they weren’t maintained properly. The warranty defines what constitutes “proper maintenance” and is often a grey area that causes arguments.
Experts recommend you go with a reputable company that won’t try to pull a quick one on you. Remember that this clause will apply to the appliances in a previously-owned home. How previous owners treated the home might create complications for you down the line.
Finally, be mindful that you’ll be stuck with the contractors, replacement parts, and quality of work selected by the warranty company. You won’t get a say in the process of repairing or replacing things that break down in your own home. Again, it’s important to go with a reputable company with good reviews.
Service call fees for each visit
No coverage if you didn’t maintain your appliances
Less control over your repairs
Annual coverage limits
Common Problems With Home Warranty Contracts
Home warranty contracts get a bad rap, and for good reason. The Office of the Attorney General has received many complaints regarding home warranty companies, so much so that they have a website with a published list of these complaints. Here are some of the most common problems with home warranty contracts:
Claim caps: Warranty contracts often put a cap on how much you can claim against an item. For example, let’s say that your washing machine breaks down. The warranty caps the claim for this item at $500 when replacing it would cost at least $1,000.
Hefty deductibles: Each home warranty comes with a deductible that you have to meet for every claim. If you do the math, you’re paying for the warranty and service fees plus the deductible on each claim. It’s best to analyze whether you’re saving any money.
Service fees: Mentioned above, home warranty contracts come with service fees. Each time you call the company, they will send out one of their contractors to your home to examine the problem. Regardless of the result, you’ll have to pay a service fee of around $50 to $125.
Exclusions: Each warranty will exclude certain types of items from its coverage. It won’t be helpful if the item you need to get fixed is excluded from your plan. Make sure you get a comprehensive list of what is and isn’t included before purchasing a warranty.
Repair-only: Some warranty companies will push to fix broken items instead of replacing them entirely. They are incentivized to save on costs, while you’ll naturally prefer a replacement. This has caused many disputes between warranty companies and their customers.
Brand limitations: When the warranty company does opt to replace a broken appliance, you might find that they’ll only use specific brands that you probably wouldn’t pick out for yourself.
Poor work or service: Consumers have reported poor work or poor service from the service providers that are pre-selected by the home warranty company. Unfortunately, you’re stuck with them unless you decide to hire your own contractor out-of-pocket.
Grey areas: Mentioned earlier, consumers have also reported problems around grey areas. Arbitration has been a common result of disputes stemming from definitions of contract phrases such as “proper maintenance.” The warranty company and the customer frequently will have very different definitions of terms, with both parties being driven by their own set of incentives.
Home Warranty FAQs
Before we wrap up you may have some questions about home warranties. Here’s what you need to know.
What Does A Home Warranty Cost?
It depends on what kind of coverage you purchase. Inexpensive policies with minimal coverage can cost as little as $25 per month, and the most expensive plans with multiple add-ons can cost almost $1,000 per month.
Should I Buy A Home Warranty?
It depends on what you need. A home warranty can be a good investment since it protects the expensive parts of your home that aren’t covered by homeowners insurance.
That said, it can cost extra money. And if you bought a new house with new appliances, they may already be covered by a manufacturer’s warranty.
How Do I Choose A Home Warranty?
First, consider how much coverage you need. Consider an inexpensive base plan if you only need to avoid the largest expenses, such as HVAC repair. If you want to be protected from more minor expenses like a new clothes dryer, look for a plan with lots of add-ons.
Next, compare prices from a few different insurers and see what they’re charging. All else being equal, choose the cheapest one that provides the coverage you need.
When Should I Skip A Home Warranty?
If you moved into a brand new home, you might already have plenty of warranty coverage. Your builder most likely provided a warranty for the plumbing, electrical, cooling, and HVAC. And your brand-new appliances will also be under the manufacturer’s warranty. In that case, a home warranty makes little sense.
When Is A Home Warranty Worth It?
A home warranty is worth it whenever you’re unsure if you can afford a major repair or an appliance replacement. It takes a few dollars out of your monthly budget. But it can save you from significant expenses in the long run.
At the beginning of this article, we asked ourselves, “are home warranties worth it?” You’ve probably gleaned that home warranties have certain advantages and disadvantages. There is no right or wrong in this situation. Instead, some homebuyers will find a home warranty highly beneficial, while others won’t. You might want to spring for the warranty if you’re buying a previously occupied home or you don’t have a handy bone in your body. On the other hand, a warranty might not make much sense if you are handy or plan to remodel the home. The complaints reported by the Office of the Attorney General paint a classic picture of “buyer, beware!” There are great house warranty companies out there. To find them, you must do your homework, read the fine print, and make sure you’re going with a reputable entity.
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