Home Warranty Policies: Worth the Cost?
The rewards of homeownership are many. But so are the expenses. The mortgage principal and interest payment on an average American home eats up 31% of the median household income, according to findings by mortgage data firm Black Knight. So if something breaks, your budget could, too.
A home warranty can provide the peace of mind that if your dishwasher goes kaput, or if the AC conks out in the middle of August, then repair and replacement costs are covered.
But a home warranty is also another line item in the monthly household budget, which also includes homeowner’s insurance, property tax and utilities — on top of a mortgage payment that swallows one-third of a family’s income.
The decision to buy a home warranty is a matter of personal preference: Would you rather pay a monthly fee for protection that you might not need? Or would you prefer to save that money, but risk having to cough up thousands of dollars on the spot for a major household repair?
The answer depends your needs and lifestyle, and there are several factors at play. Here’s a look at what you need to know to decide whether a home warranty is the right fit for you.
How a home warranty works
Not to be confused with a homeowners insurance policy, a home warranty is a contract between a homeowner and a warranty company that provides service, repair or replacement on a home’s major systems and appliances. A home warranty can supplement homeowners insurance, but it’s not intended to be a replacement.
Pros of a home warranty
• Cost savings. A major advantage of home warranties is that you may be able to save thousands of dollars on expensive home repairs. This can be an important benefit if you don’t have an emergency fund saved up.
• Convenience. Since home warranty companies select their own service providers, a warranty can save you the legwork of having to track down a contractor when you need a repair.
• Contractor accountability. Several home warranty companies guarantee a response within 48 hours, and a labor guarantee of 30 days.
• Fills in homeowners insurance gaps. Homeowners insurance typically doesn’t cover the types of things a home warranty does. And for systems that are covered, the cost to repair or replace them likely wouldn’t meet the policy’s deductible. A home warranty can offer another layer of protection.
• No DIY necessary. If you’re not much of a do-it-yourselfer, a home warranty may be a good option that could keep you from having to break out the toolbox.
• They’re affordable. You can find home warranties that cost as little as about $30 a month.
Cons of a home warranty
• Premiums and service fees. You will have to pay an annual, quarterly, or monthly premium for your home warranty contract, regardless of whether you use it. You also have to pay a fee every time you put in a request for service — even if the technician is unable to fix what’s broken.
• Claims can get denied. The home warranty company can refuse to fix appliances that they consider improperly maintained, or if the company determines you caused the damage through your own negligence.
• Not everything is covered. If the electrical system goes out in a detached structure like a guest house or garage, your home warranty may not cover repairs outside the main structure of your home unless you have paid for a policy upgrade.
• Limited selection for homeowners. The “you get what you get” rule is very much in play with home warranties. Warranty companies authorize specific service providers to make repairs, so you probably won’t be able to rely on your go-to plumber or electrician. You also may not get to choose which brand of appliance you want if a replacement becomes necessary.
• Repair costs are capped. Most homeowners policies set dollar limits for how much they’re willing to pay to repair or replace specific systems and appliances. So if the policy limit for a washing machine is $800, but a new machine costs $1,200, the homeowner would have to cover the $400 difference.
• Kicking the can on replacements. Home warranty companies generally favor repairs over replacements. That means you may need to have the same oven malfunction fixed three or four times before the home warranty company agrees to replace the entire appliance.
Considerations before you buy a home warranty
What are the costs of a home warranty?
• Premium: This is the actual cost of your warranty. The cost of a basic contract would be around $400 to $550 per year, according to the National Home Services Contract Association.
• Service fees: These typically range from $35 to $100 per call, according to NHSCA.
• Additional Coverage: If you want more than basic coverage for your home’s systems, there are upgraded packages you can choose from to cover appliances and other components. Then if you want coverage for a specific component, such as a pool or septic system, you can add it to your warranty as a line item.
What’s covered by a home warranty?
According to the National Home Services Contract Association, covered systems and appliances typically include:
• Interior plumbing
• Heating systems
• Electrical systems
• Water heaters
• Ductwork
• Dishwashers
• Ovens, ranges, and cooktops
• Garbage disposals
• Garage-door openers
• Air conditioning (may be optional coverage)
• Refrigerator (may be optional coverage)
• Washer dryer (may be optional coverage)
• Pool equipment (optional)
• Spa equipment (optional)
Do I have an emergency fund?
Experts recommend setting aside 1% to 4% of your home’s value each year for emergency home repairs. If you don’t have that much set aside, a home warranty could be a good option.
How long do I want to keep the warranty?
It’s a common practice for home sellers to offer a home warranty contract to sweeten the deal for the buyer. If you’ve recently purchased your home, it might be useful to hang on to the warranty for a year or two until you get a better feel for what kind of shape your home’s systems are in.
How old is my home?
Older homes tend to get more value out of home warranties, since they have may aging components that require regular repairs.
What do I know about the warranty company?
Make sure to vet your home warranty provider before you sign a contract. Check with the Better Business Bureau and your state attorney general’s office for any complaints. The company may have also registered with the National Association of Insurance Commissioners.
Did I read the fine print?
Read your contract carefully to look for excluded repairs, systems, and components. Pay special attention to the contract’s improper maintenance clause, which may make you responsible for repairs if the company suspects a lack of maintenance.
Remember: There is no law or insurance policy that requires you to purchase a home warranty. These policies are completely optional. If a home warranty isn’t for you, that’s OK. But if it fits well with your lifestyle, then go for it.
