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If you’re thinking about buying a house or recently became a homeowner, someone has probably tried to sell you a home warranty. Unlike homeowner’s insurance, home warranties cover the day-to-day working parts of your home — the stove you use to cook your egg-white veggie omelet, air conditioning to cool a home on hot summer days, or the plumbing that empties out the bubbles from a toddler’s toy-filled bath.
However, there are limits to what they cover, and they may or may not be a good fit for reasons we’ll discuss as we weigh the pros and cons of whether you really need a home warranty.
What is a home warranty?
If you’ve ever bought a used car, you may have been offered an extended warranty to cover some or all of the expense of major car parts that may nearing the end of their mechanical life. A home warranty works under the same principal, covering the working parts of your home that may be near the end of their functioning life.
The important thing to understand is that home warranties are not insurance, they are service contracts. In most cases the coverage is meant to service the covered items, not replace them. Although ultimately the coverage may cover the cost of replacing an air conditioner or dishwasher, you may have to pay a premium to have a technician come out and make that determination.
You can pay the entire premium upfront, but most warranty providers prefer to bill the annual premium in monthly installments. Unless you select a higher priced premium plan, you’ll also need to pay a service fee to a technician to verify any claims you request for repairs or replacement of covered items.
Home warranties are completely optional: unlike homeowner’s insurance, mortgage lenders don’t require that you purchase or maintain a home warranty.
What does a home warranty cover?
There are a lot of moving parts in a home, and all of them contribute to the comfort and safety of your day-to-day life. Even if your home is inspected by the most proficient home inspector around, what’s behind the walls or in the mechanical components of everything from your plumbing and air conditioning to your washer and dryer may not be visible.
The graph below gives you an idea of what a home warranty covers. These are all items that are not usually covered by homeowner’s insurance.
The items listed above are the most common ones covered by a regular plan. You might be able to cover the following by paying an extra premium for each component:
- Septic system
- Water softener
- Well pump
Look at the fine print of each covered component to make sure you understand exactly what the warranty will pay for. For example, American Home Shield’s sample contract covers all components and parts on a garage door, except for the door itself and door track assemblies.
How much does a home warranty cost?
According to Consumer Affairs, home warranty premiums range from $300 to $600 per year. The cost varies based on where you live, and you can get an idea of where whether warranties run higher or lower in your state at sites like ReviewHomeWarranties or Consumer Affairs.
The entire premium may be prepaid for the entire year by the seller if a home warranty is being provided as an incentive to buy a home, but most providers will bill the cost of the plan monthly. That makes the average monthly cost $25 to $50 for home warranties in the $300 to $600 per year range.
If you get extra coverage for items that aren’t featured on the regular plan, expect to pay more for each item you add for coverage. You can also select specific “appliance” or “system” plans, if you want coverage for one or the other instead of both. There are other factors and costs that go into the price of your home warranty that will have an impact on how much you’ll spend.
You’ll want to take a look at your policy to find out how much your home warranty deductible is. You may also see it called a “service fee” or “call fee.” The fee pays the technician that make the service call to see what’s wrong with whatever covered item you’re calling about.
You can choose a plan with the service fee built in, but the premiums for those plans will be more expensive. If you pick a regular plan, you’ll typically pay a service fee between $50 and $125. Service fees are additional expenses that above the cost of the monthly or annual premium payment for the warranty plan selected.
Downsides to buying a home warranty
There are many arguments against buying home warranties, especially since home warranty companies have historically been one of the “worst graded” categories on Angie’s List.
- Your claim can be denied if the problems existed before. Think of a home warranty like an insurance policy. When something happens, you file a claim (referred to as a “service call”). An adjuster comes out to assess the damage and later submits their findings to the home warranty company, which renders a decision. That decision could be a denial of your claim. One of the most common reasons home warranty companies deny claims is due to pre-existing conditions, or problems that existed before you purchased the policy. The company may even require that you turn over a copy of the home inspection report to ensure that the issue wasn’t cited during the inspection.
- You can’t pick your contractor. Warranty providers require that homeowners work with specific, pre-approved contractors. Homeowners may sometimes be disappointed in a long wait time for service or poor quality of service provided by these contractors, but they can’t fire them and pick their own.
- You may get repairs when what you want is a replacement. The service technician will always try to repair the appliance or system first and replace it only if it is beyond repair. That can be a hassle.
How to shop for a home warranty
Negotiate a policy with the home seller. Your real estate agent is probably the best starting place for home warranty shopping. Home warranty companies often provide flyers and brochures at open houses, and tend to work with agents to help solicit their products. Sellers may offer to pay for one if the home for sale is older and hasn’t had recent upgrades.
Compare your options. There are a number of websites that provide comparison reviews of home warranty plans, as well as options to get quotes from several different companies based on the parameters you input. Once you’ve received some feedback, review them to determine how the total coverage stacks up with each offer. Look at how much the service fees are, what they cover, and what the maximums the warranty will pay for replacement.
Review your home inspection report to understand your needs. Your home inspection may give you an idea of how to shop as well. If the inspection indicates the appliances are newer and upgrades, but the air conditioning and plumbing system are older, you may just want to shop for the most competitive systems plan.
Vet companies carefully. According to Consumer Reports, most of the complaints the Better Business Bureau receives about home warranties relate to misunderstandings about what coverage is provided under their plans. This means you need to read the fine print about each covered item so you know exactly under what circumstances the item will be covered.
There are also limits to how much different plans pay out, so you may end up digging into your pocket to pay the difference for a replacement.
When it makes sense to purchase a home warranty
Home warranties can provide an extra financial buffer for homeowners, and may be a good fit in the following situations.
#1: You don’t have handyman skills
If you’re not mechanically inclined or if, as a renter, you used to call the landlord whenever the fridge made a weird noise, a home warranty will give you the comfort of calling someone trained to fix those things once you own a home.
There is always a service charge associated with visits to check a covered item, but it may be worth the cost if you obsess about whether the fridge is going to break down in the middle of the night.
#2: You’re on a tight budget without reserves for a major repair
If you’re a first-time homebuyer and had to use most of your funds to make a down payment and pay closing costs, you may not have a lot of reserves left over for a major purchase if something breaks down soon after you move in.
Although the warranty might not cover the entire expense of a new dishwasher or water heater, it may cover enough to keep you from having to use a credit card or hitting up a relative for a temporary loan.
#3: You’re buying an older home with older appliances and major systems
Not every seller updates their home’s components over the years, and although the home inspector may give you an idea of how old they are, they may be closer to the end of their natural life than you know. A home warranty will at least give you some insurance if some of the systems or appliances start having problems within the first year of buying your home.
When it doesn’t make sense to purchase a home warranty
Not everyone is a good candidate for a home warranty, and knowing that will help you allocate the funds to something more worthwhile.
#1: You’re buying a brand new home
When you have a home built, or buy a home that’s just been finished in a neighborhood, most of the appliances and systems are probably covered under the manufacturers warranties. For example, a standard 2-10 warranty offered through a builder covers you for defect over the following periods: a year for workmanship, two years for systems and 10 years on the structure. There’s really no need to spend the money on a home warranty for a newly constructed home.
#2: The seller is giving a credit toward new appliances or systems
It’s not uncommon for a seller to offer to pay some closing costs, so you have extra cash to pay for upgrades to items that are in need of upgrade. If the home inspector indicates that something like a water heater or air conditioner really is in bad shape, you may be better off asking for it to be replaced as part of the home purchase.
#3: You prefer to buy new appliances when the current ones go bad
If you prefer to buy a new car every two or three years rather than keeping an existing one running, you may have the same mindset about appliances and systems. Some homeowners prefer to the newest and best bells and whistles in their homes, making a home warranty unnecessary.
#4: You already have reserve funds for potential repairs
You can save on the expense of a home warranty and any related service calls by having money set aside for maintenance and repairs on your home, or allocate a certain amount of your budget every month to building a rainy day repair fund.
Final thoughts about home warranties
It’s never a bad idea as a first-time homebuyer to have a little extra insurance against unexpected home repair needs. You’ll probably find as time goes on that you’ll learn how to do easy DIY repairs like unclogging a garbage disposal or an annoying leaky faucet.
However, if you prefer to let someone else take care of any household repairs, or just don’t have the time or desire to learn how to do handyman-type jobs, a home warranty may be worth the money.
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