Do You Need a Home Warranty?

Buying a house requires investing a lot of time and money into a property which will also serve as your home. An investment this significant requires some protection. Homeowners insurance is a must, but your insurance policy wouldn’t cover worn out or broken appliances and home systems such as your plumbing, HVAC, or electrical wiring. This is where a home warranty could save you money in the long run.

What is a Home Warranty?

The term “home warranty” can be misleading. Consumers often expect a warranty to replace a damaged or broken product whether it’s a smartphone, a tire, or a small appliance. Your home warranty would not provide a new home if something bad happens to your home. (That’s what homeowners insurance is for.) A warranty should, however, help you arrange and pay for repairs to systems in your home. In essence, a home warranty is a service contract. A home warranty plan can be purchased when a house is bought or sold or by a homeowner who is currently residing in the home. In the case of a home sale, the home warranty plan may be purchased by the buyer, the seller or in some cases even the real estate agency as part of the sale. The home warranty plan covers the maintenance, repair, and replacement of appliances as well as heating, cooling, plumbing and electrical systems. These are things that are generally not covered by homeowners insurance, thus the cost of maintaining, repairing or replacing would fall squarely on the shoulders of the homeowner.

What Does a Home Warranty Cover?

Home warranty plans are as varied as the companies that provide them. They all work similarly, but each company and contract also have significant differences. For this reason, you should carefully review each potential company, as well as the agreements they offer, to find the best home warranty contract for your needs. With certain exceptions, most home warranty plans work like this:

• The homeowner contacts the home warranty company when an appliance or home system stops working properly.
• The home warranty company will then contact a service technician with whom they have a contract, who will, in turn, contact the homeowner to set up an appointment.
• The service technician repairs or replaces (based on contract) the malfunctioning appliance or home system.

The homeowner pays the one-time service fee (usually less than $100). The following items are generally covered by a home warranty plan: dishwasher, garbage disposal, range, oven, air conditioning, furnace, water heater, ductwork, indoor plumbing stoppages, electric system, and ceiling fans. Some warranties allow you to add on extra systems or appliances such as garage door openers and swimming pool equipment.

Is the Value of a Home Warranty Worth the Cost?

Asking someone whether you should buy a home warranty could lead to two extreme answers:

1. No, home warranties are a waste of money. You pay hundreds in premiums and get little or no help fixing your home when needed.
2. Yes, home warranties are a sensible precaution. In exchange for regular premiums, you get protection from expensive home repairs.

Which, if either, of these scenarios is true? The answer really does depend on the personal experiences of the people you ask. To keep from wasting your money on a home warranty that doesn’t pay off, set aside an afternoon or two to research and review many home warranty companies as well as the agreements they offer. Just like getting multiple insurance rate quotes before buying insurance, it’s also a good idea to get home warranty quotes to compare prices. Read the fine print and ask for recommendations from trusted friends, family members, and co-workers. This will help in weeding out the companies that provide little to no real protection if you need maintenance, repair or replacement of appliances and home systems.

How to Compare Bad vs. Good Home Warranties

While you should consider recommendations of family members and friends, it’s ultimately up to you to determine whether a home warranty would be a good investment. You can find out a lot by taking the time to read a contract and its conditions and exclusions. As you explore the details, be on the lookout for specific conditions such as these:

• Systems Covered: Different warranties cover different systems. Many companies let you choose which systems your contract will cover. Make sure your warranty covers the systems and appliances you need it to cover.
• Spending Caps: A warranty company will spend only so much in a year on your home. Some warranties limit per-system spending while others have overall limits. A warranty with low spending caps can lead to frustration.
• Service Fees: As I said above, pretty much all warranties require you to pay a service fee before they’ll pay for repairs. Be sure you know the fee structure before signing the contract.
• Regular Maintenance: Most warranty contracts require you to maintain your home’s warranty-covered systems. If your AC breaks and it hadn’t gotten any regular maintenance for the past several years, for example, your warranty may not help you with the repair or replacement. Your contract will spell out these requirements. Some warranties even require a home inspection in advance.
• Other Exclusions: With so many warranty companies, you can find dozens of different exclusions. A warranty may, for example, exclude your electrical system if lightning or flooding caused the damage.

Not fully understanding these limitations which are built into your contract can cause a lot of frustration when you need help. Sure, when something in your home breaks, you may expect your warranty to help. But if the problem falls outside the boundaries of the warranty’s contract, the warranty simply won’t pay and you’ll feel as if you’d wasted every penny spent on premiums. So I’ll say it again: Before signing a contract, read the entire document. Get a magnifying glass or zoom in close on your screen if necessary. Your warranty’s performance and usefulness depend so much on this fine print. And, when you become an expert on the contract, you’ll know from the very start whether you’re getting a good or a not-so-good warranty.

Pros and Cons of a Home Warranty

Only a thorough examination of a particular home warranty contract’s fine print can give you a full understanding of its strengths and weaknesses. But, in general, home warranties have some common strengths and weaknesses:

Pros

• Peace of Mind: Someone who worries about paying for unexpected home repairs can feel more at peace knowing their home warranty is providing at least some insulation against out-of-control repair costs.
• Centralized Help: A home warranty provides a single source for home system repairs or replacements. Even if you had to pay out of pocket for a repair, you’d have access to a network of home repair pros through the warranty.
• Selling Aid: If you’re selling your home, having a home warranty in place can sweeten the deal and help finalize the sale, especially if you’re selling an older home.

Cons

• The Expense: It’s not uncommon for a homeowner to pay $1,000 a year for a home warranty. This premium does not include service fees or out-of-pocket spending after the cap.
• The Limitations: A warranty will perform only within the confines of its contract. Contracts include common limitations as we’ve already discussed above.
• Even More Limitations: Warranties typically do not let you, as the homeowner, choose the repair technician or decide which local company should replace your HVAC system. Warranty companies either have their own repair staff or have agreements with a home repair company in your area.

Alternatives to a Home Warranty

Getting a home warranty usually makes the most sense if you own an older home, or if your home has aging systems and appliances. But warranties aren’t the only way to plan for expensive repairs. You can also:

• Use Savings: Rather than paying warranty premiums, you could put the money — plus more — into an emergency repair fund. After a few years, you could have a few thousand dollars available for a home repair emergency.
• No-Interest Loans: If you suddenly needed a new washing machine or a dishwasher, you could possibly find a no-interest loan from a department store or a credit card company. This idea can backfire if you don’t pay off the loan during the promotional no-interest period, before interest kicks in.
• Self-Reliance: A homeowner who happens to be a contractor or an expert on fixing things can save a lot of money by providing his or her own free labor. Sure, you’ll still need money to buy parts and equipment once in a while, but you’re more likely to get by without a warranty.
• Other Protection Plans: A new HVAC system or washer-dryer, for example, usually comes with its own manufacturer’s warranty. With these kinds of protection in place you can rely less on a home warranty.

Who Should Get a Home Warranty?

Any homeowner can benefit from a home warranty. Typically, though, a warranty will benefit some homeowners more than others:

• Consider a Warranty If: You have an aging home and worry about how you’d afford to repair or replace a system or appliance.
• Consider Skipping the Warranty If: You have other ways to pay for repairs or everything in your home is new and/or covered by manufacturer’s warranties.

If you decide to shop for a warranty, take control of the process. Read the fine print and make sure you understand the warranty’s limitations before signing the contract.