You have just closed on your home purchase and money is going to be tight for a while. Should you buy a home warranty to help you avoid out-of-pocket expenses or will it be a waste of money?
Before you decide if it will be worth it to you, you should understand what a home warranty really is and what it can do for you.
1. What is a Home Warranty?
A home warranty, also known as a home service contract, is a home protection plan that covers the cost of repairs or replacement of your home’s critical systems and appliances when they get damaged or break down due to regular wear and tear. Many home warranty plans will typically cover:
- Plumbing
- Electrical
- Major appliances, such as refrigerators, microwaves, washers, and dryers
- HVAC, central vacuum, and garbage disposal systems
- Contractor or repair services by plumbers, electricians, etc.
Depending on your needs, you can also purchase optional add-on coverage for your hot tub, second refrigerator, swimming pool, pumps, garage door openers, and more.
2. Types of Home Warranty Plans
Home warranty plans differ in terms of price and coverage – more expensive plans mean more coverage. The cheapest home warranty plan covers one specific appliance, such as a washing machine.
There are other plans that cost more and cover multiple appliances, such as your washing machine, refrigerator, and dishwasher.
The most expensive type of home warranty plan covers both major appliances and systems, such as your electrical and HVAC systems. Even such plans may not cover all your appliances or systems. Check the warranty contract for exclusions, such as outdoor pool equipment or a second refrigerator. You can negotiate with your insurance company to cover additional items over and above the original policy.
3. The Difference Between A Home Warranty and Homeowner’s Insurance
The key difference between a home warranty and homeowner’s insurance is what they cover. A home warranty plan covers wear and tear to many of the appliances and systems inside your house, while homeowner’s insurance covers accidental damages to your home’s structure and personal belongings due to overflow of water, theft, fire, storms, and other natural disasters. Additionally, homeowner’s insurance can protect you from liability when a person is injured while on your property.
A homeowner’s insurance policy is usually mandatory if you have taken out a mortgage loan to finance your home and the bank will require you to obtain one before closing on your mortgage. By contrast, a home warranty is optional and functions as a service contract which typically lasts twelve months and can be renewed.
4. The Benefits of Home Warranties
One of the main benefits of a home warranty is that it covers your home’s appliances against unforeseen damage. If a system or appliance in your home breaks down, the warranty company will dispatch a qualified service provider to repair the defective item. For this reason, a home warranty makes sense for homeowners who are not very handy or those who do not want to spend time tracking down a contractor or repair company.
The annual warranty fees are relatively inexpensive compared to the price of having to replace or fix an expensive home appliance. A home warranty offers you have peace of mind that the defective appliance will be repaired or replaced, without costing you thousands of dollars.
5. The Drawbacks of Home Warranties
The biggest drawback of a home warranty is that it does not cover everything. Your claim may also be denied if the appliance or home system was not properly maintained, even if it is covered by your warranty. What constitutes “properly maintained” can be a gray area, however, which may cause disagreements between the warranty company and the homeowner. This problem could arise if the previous homeowner did not take care of the appliance and you are left footing the bill.
The home warranty company will send out a contractor when an appliance needs attention, so you do not have the option of choosing a contractor yourself. Like most policies, home warranties also have coverage exclusions and limits for repairs. For example, a warranty company may limit claims for HVAC systems to $1,500 and you will be responsible for any cost above this amount if your HVAC system needs to be replaced.
Many appliances are already covered by their manufacturer’s warranty, which may negate the necessity for home warranty coverage. However, the older your home is, the more likely it is that something will break, and a home warranty will cover it even after the manufacturer’s warranty has expired. Some home warranty contracts don’t even differentiate between newer and older homes in terms of cost.
6. The Cost of Home Warranties
A home warranty has an annual premium which is usually paid up front or in monthly instalments. The cost of a home warranty can range between $350 and $600 a year, depending on the company, level of coverage, and the size of your home. If your home’s square footage is under 5,000 square feet, you can usually be covered under a standard warranty. However, if your property is bigger than the 5,000 square footage limit or if you have a guest house, the cost of coverage increases.
In addition to your annual or monthly premiums, home warranties also charge a service call fee that you will have to pay every time you request a service. A one-time service call usually costs between $60 and $125.
7. Seller’s Coverage
Several home warranty companies provide free seller’s coverage during the listing period in the hope that the home buyer will choose to continue the coverage. This coverage also benefits the seller by protecting the home contents while the home is on show. Sometimes the seller will try to entice buyers by offering to pay for the first year of the new buyer’s home warranty.
Making the Decision
Everything breaks eventually, and a home warranty could be the perfect solution to avoiding costly unforeseen repairs. However, before you purchase a warranty, be sure to read the fine print of the warranty contract carefully. Get a sense of what will and won’t be covered, as well as the limits the warranty company will pay for repairs and replacements. Then, weigh the benefits and the risks, keeping your pocketbook in mind.
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