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:
- No, home warranties are a waste of money. You pay hundreds in premiums and get little or no help fixing your home when needed.
- 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.
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Patrick Callaghan says
Ok, I’m debating this currently. We were gifted one by our agent when we first bought the home, and even if we paid for it. I’m thinking that having one more year with it would be helpful, we have had both the A/C and Heater checked and maintained and warned they were extremely inefficient and didn’t have many years left in them (maybe 1-2 years). So long as they were well maintained the contractors said that the units would be covered. I’m looking for suggestions though. I know a properly sized HVAC system for the house would cost $6,000-$8,000. HSA warranty renewal is around $800 and I’m shopping around.
Ryan says
Patrick, be sure to read the fine print on the contract, but it might well be worth it. The fine print usually states the appliances or other items must be maintained, so be sure to keep your service records. Best of luck!
Kim @Moneyandrisk says
Ryan,
I recommend that home buyers get a home warranty for the first year because no inspections can cover all the possible hidden defects. After that, people just need to be vigilant about maintaining their home.
When I bought my first home, we got a warranty. Two weeks after we moved in, the water pipes burst and flooded the second floor and down to the living room. We had to move out for 3 months while the plumbers replaced all the pipes in the house. They replaced one area, a new one would burst due to the different pressure. (Yes the house was old.)
The warranty paid for the pipe replacement (it was thousands of dollars) but the devil is in the detail. They don’t cover the drywall that they broke through to replace them. Our return on that $250 policy was about $8,000. We had to pay the rest ourselves.
Ryan says
Wow! Wonderful example. It’s tough to pay for the drywall and other associated costs, but saving $8,000 is a wonderful deal and certainly made the home warranty worth it!
Meiling says
Hi Kim,
Can you give me the warranty company infomation? Thanks!
meiling
Laura says
Ryan- We had a home warranty ($700+ w/lots of extras) when we purchased our home. For each of 4 calls ($100 per visit), the warranty specifically excluded THAT particular item. E.g the heat sensor on the dryer; the backflow preventer valve on the pool isn’t included because it’s a part that’s not IN the pool, the leak on the solar water heater, etc, etc.. In each case I had to pay $100 for a visit but that technician couldn’t actually perform the repair and I needed to call someone else. I keep hearing stories from people who got their entire AC unit replaced and I couldn’t even get the dryer to pump heat! How do you evaluate these companies?
Ryan says
Laura, the best way to weed out companies is to do an online search for consumer complaints against them. You can often eliminate many options right away. Next, check with Better Business Bureau and your state board. You may also want to see if your state has any regulations or if there is a governing board for home warranty associations in your state.
Once you have a short list of companies, you may want to evaluate the policies side by side. Admittedly, this takes a lot of work and can be a daunting task, but it will be worth it if it saves you several hundred dollars and gives you peace of mind.
There are also several comparison sites out there for home warranty companies, so you can check with those.
Susan J says
I have a Home Warranty and I have more than been satisfied that I got it . I pay about 25.00 a month and have had the plumbing under the house(all of it ) replaced for 45.00. that was two years ago.Ive had the main line cleaned out several times for 45.00 dollars and the savings to me are so worth it.
Brian says
Here’s the main issue that most people forget. Most, if not all, home warranty contracts state that you must have been properly maintaining the device that breaks and they require documentation when you place a claim. If you purchase a home warranty for that 20 year old air conditioning system that you know might not last and then you place a claim for it when it does break, you will be required to show that you have been properly maintaining the unit each year or your claim will be denied. AND you will not know your claim is denied until after they have sent out the company THEY choose and you already rack up the bill with that company. Home warranties can work for the new home buyer in year 1 as you do not have the responsibility to have maintenanced all of the major items but after year 1 and for those that buy it themselves for a home they’ve lived in for awhile, be prepared to show proper maintenance records or you will be faced with claims being denied when you needed the coverage most.
KELLI says
if an air conditioner is 20yrs old how can anyone say lack of maintanance is why it failed?? and i have never had to supply my warranty company with any proof of maintenance.
Kimberly says
I’m a single parent (1 child) who purchased a single family home last year that is updated but, appliances are probably 5-10 years old. I purchased a home warranty through AHS that covers core appliance items and a few extras which, totals $700 annually. I haven’t needed to use it yet and my renewal is due in 2 months so, I am contemplating the options. I see both arguments; I’d like to pay myself the money since I can probably afford a new microwave or dishwasher. However, if my AC, heat pump or bigger ticket item had to be replaced, I’d have to pay with credit. In my case, what makes the most sense? I’m leaning toward the warranty…
Ryan says
Kimberly, a home warranty makes sense for someone who doesn’t have the funds to cover a major expense, but $700 a year adds up quickly – especially if you never use it. If your biggest concern is your AC unit going out, then it might not be a bad idea to call an Air Conditioning service technician to your home to do an inspection on your AC unit and furnace to give you an idea of what kind of condition it is in and if it needs any maintenance. That wouldn’t be a guarantee against it breaking down, but might help you sleep better at night.
Then you can take that $700 and save it in a savings account specifically for home repairs, nothing else. After a few years, you should have enough in that home repair savings account to handle almost any home repair that comes along.
Kim @Moneyandrisk says
Kimberly,
That home warranty sounds pretty expensive. You might want to check around with other insurers to see if you can get something better. The other thing is to leave out core appliances as an option and save the difference.
Check out the age and remaining quality of your really big ticket items that you are concerned about. Then make that risk determination.
Doug Warshauer says
I’ve never had one, so I can’t speak from experience, but like most optional warranties, it probably makes more sense to self-insure. To offset the cost of marketing and overhead and to produce an acceptable profit, these plans have to be huge moneymakers for the providers. Odds are you are going to spend at least double on your premium what you’ll receive in reduced repair/replacement costs.
Of course, insurance is supposed to protect against catastrophic events, so perhaps that is an argument for buying it here. From your list of what’s covered, though, I don’t see anything that is likely to be so overwhelmingly expensive that it would cause significant financial hardship if it needed replacing. (If that’s not the case, the homeowner may have overstretched on their home purchase.) All things considered, I’d be inclined to pass.
Ryan says
Doug, I think self-insuring is probably the best option for most people, but there are times when it could be worth purchasing one of these plans.
For example, I was talking with a friend last night and he mentioned they had a problem with their air conditioner last summer and were quoted $6,000 to replace it (they fixed it instead for a few hundred bucks). But they were concerned because it is 22 years old and they have no idea how much longer it will last.
I recently had a quote for a home warranty service that came in at $420/year. So using that quote (quotes may vary, so be sure to check multiple companies), their air conditioner would have to last 14 more years before going out for them to have spent more on the warranty program than a new unit – assuming the cost of the new AC unit remains the same for the next 14 years, which isn’t likely.
So in their case, it may be worth purchasing a home warranty.
I think the age of your home, the condition of your appliances, and other factors should play a role in your decision making. Another time it may be worth buying a home warranty is when you buy a home – you can often get the seller to pay for the first year for you.
final note: most home warranty plans come with a 30 day grace period, to prevent people from purchasing a plan and making a claim right away.
Robert says
I do not carry a home warrenty. I have had one at one time and never had the opportunity to use it. However, I do see some benefit if you are moving into a new house. Of course you should always get a home inspection, but there can always be something missed. In this situation a home warrenty can give you a little piece of mind. Also, you can also ask the sellers to provide this as part of the deal, most will not have a problem with this.
Ryan says
I don’t have it either, Robert. But all it takes is an air conditioner unit or furnace to go out to make it worthwhile. Overall, I think it might be a good option for those who don’t have the means to cover something that costs several thousand dollars.