These days, it seems like there are warranties for everything. From cars to laptops to, yes, even homes, you can purchase a warranty for all kinds of things.
But should you?
Not every warranty is worth it and every situation is different, especially when it comes to home warranties. While a warranty can be a good safety net against expensive, unforeseen repairs, getting one is not always the most financially sound decision.
In this piece, we’ll educate you about home warranties, what they cover, and discuss when a home warranty is a good decision.
To clear up any confusion, a home warranty is not the same as homeowners insurance. Insurance covers major disasters like fires, hail damage, property crimes, and flooding that could damage the home itself or the owner’s personal possessions.
On the other hand, a home warranty is a contract between a homeowner and a company that offers discounted repair and replacement service on a home’s major systems like the furnace, HVAC, plumbing, and electrical. A warranty could also cover appliances like washers and dryers, refrigerators, and pools.
Basically, homeowners insurance covers your possessions and the home itself, reimbursing you from unavoidable damage. A warranty — which you can customize through most providers — helps you save money when repairing or replacing the appliances and components within the home. When something covered by a home warranty breaks down, the homeowner contacts the warranty company, which dispatches a partner service provider, while the owner only pays a service fee for the job.
A home warranty’s cost depends on a few factors. The property type (single-family detached, condo, townhouse, or duplex), the term of the plan, and specific coverages all impact what you’ll pay. But the average cost for a home warranty in 2022 is $1,029 per year.
Generally, a home warranty’s cost doesn’t take the property’s age or square footage into account, unless the home is brand new. Brand-new homes carry increased warranty costs. Properties greater than 5,000 square feet may also have more expensive warranties. Separate structures like guest houses usually are not covered by a basic policy but can be added to the coverage for another fee. (Garages are included standard.)
In addition to the annual premium, home warranties tend to charge a service call or trade call fee of up to $100 every time a homeowner requests to have a service provider examine a problem in the house. That’s per visit, so if multiple contractors have to visit, there may be a fee for each visit.
Additionally, some repairs aren’t covered by a warranty, either because a homeowner didn’t purchase coverage for that item or the coverage isn’t offered by the warranty company. If a warranty company denies a claim, the homeowner will be on the hook for the service fee and repair costs.
Home warranties exist for a good reason. Homeownership can be extremely expensive. There are so many individual components of a home that could break, requiring expensive, unforeseen bills. A home warranty can provide some peace of mind that you won’t have to tap into an emergency fund if your refrigerator suddenly breaks.
If you have limited information about how well a home or the appliances within the home have been maintained, a warranty can also give you a fallback option if something breaks early in your homeownership, before you’ve rebuilt your savings. If you’re not handy or you don’t want to worry about tracking down a contractor when you have a problem, warranties also offer a convenient solution for all your repair needs.
Most importantly, home warranties are significantly less expensive than paying out-of-pocket to repair or replace major components in your home.
The biggest issue with home warranties is that they’re generally vague and the opportunity costs are unpredictable.
Home warranties will not cover items that have not been “properly maintained.” That’s a significant gray area about which home warranty companies and warranty holders will often disagree. Unscrupulous warranty companies may use this clause to deny valid claims. With limited information on previous maintenance of a home, a homeowner may struggle to prove proper maintenance and have to pay for significant repairs.
While home warranties may not be expensive, many have dollar limits per repair or per year, among other exclusions.
Finally, you may not use a home warranty every year, so you could feel like you’re paying for nothing. That money may be put to better use in an emergency fund. When you do invoke the warranty, you might not like the contractor the warranty company chooses or the work that gets done. It’s impossible to really estimate the opportunity costs when you can’t predict when things will break.
Ultimately, it’s difficult to say if a home warranty is worth it for you. You have to look at your personal situation to figure out if the costs are worth it.
You can lock in a warranty for an annual premium of just a few hundred dollars, but you’ll also have to pay for service visits, you may be subject to dollar limits for repairs or replacements, and there’s no guarantee a warranty company will even grant your claims. Especially if your home is older, with outdated systems, you may have to replace rather than repair, which the warranty provider may refuse to do.
Then, of course, there’s the drawback that you might not ever even use a warranty. If your home is in good shape and you don’t have to make any expensive repairs for a year, you paid for something you never used. Of course, that’s the thing about warranties and insurance — you hope you never actually have to use them.
We’re implying here that a home warranty isn’t worth it and, for many homeowners, that’s true. But it’s not always the case.
When you’re going through the homebuying process, you’ll get at least a little familiar with your new home. Even if there isn’t a ton of information available about the maintenance history of the home’s major components, you can probably draw some conclusions just by looking at things. Likewise, a home inspection will flag if appliances or systems are nearing their lifespan.
When you have a decent idea that you’re going to have an expensive repair or replacement within the first couple of years of owning your home, it’s a good idea to get a home warranty. Just make sure you understand the terms and conditions of the warranty, how long the coverage will last, and that you know what it covers.
Additionally, if you’re buying a home that already has appliances or systems under warranty, you might as well cover the remaining terms on the coverage. The previous owner may have gotten the coverage for a good reason, after all.
Homeownership is expensive. Home warranties are an imperfect solution to the hidden costs and financial risks that homeowners must navigate. If you do choose to purchase a home warranty, make sure you’re working with a reputable company and you fully understand the fine print of the contract. It helps to do a little math, too, to see what you can afford and what repairs are most likely and/or will be most expensive.
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