If you’re a homeowner (or aspiring to be one), you may be familiar with some of the common expenses that come with having your own house to call home.
There’s your monthly mortgage payment. Your property taxes. HOA fees if you’re a development dweller. Utility bills. And you may also opt for having homeowners insurance.
On top of all that, you’ve got the option to add another expense: a home warranty.
We’ll buy warranties on everything from cars to appliances, so why not for your house? A home warranty can help mitigate the costs to repair or replace major items in the event that your central air or heating might break down, or a new fridge might go berserk.
But unlike paying your property taxes or HOA dues, buying a warranty is entirely optional. It may appear a solid way to protect all the stuff you’ve spent hard-earned money on, but a home warranty may or may not be worth incorporating into your budget.
Is a home warranty a practical piece of coverage that can save you bucks, or just a waste of cash? Here’s what to know.
A home warranty is not homeowners insurance
Homeowners insurance and home warranties both offer coverage and protection against damages to your home, but they’re not the same thing. Here’s where they differ:
Homeowners insurance is a type of liability coverage that protects you against losses if your house suffers a calamity like fire, damaging winds or rain and lightning, vandalism or theft (but not flood). With an insurance policy, you’ll take your payout and hire a contractor to make repairs as needed. However if your furnace calls it quits, it won’t be covered under your homeowners insurance policy.
A home warranty is a service contract to pay for repairing or replacing specific components of your home, like your HVAC system, your furnace or boiler, your swimming pool or spa, or your plumbing or electrical infrastructure. Your annual fee pays for dispatching a contractor (like a plumber or electrician) to your house to perform the repairs whenever a problem arises. But if a fire or fierce wind takes out half your house, your home warranty won’t foot the bill.
Homeowners insurance isn’t mandatory if you’ve paid off your home loan and own your house free and clear. But it’s usually required if you have an active mortgage. Premiums can cost between $300 to $1,000 a year. If your house suffers damage, you’ll file a claim, have it assessed, and be issued payment depending on the severity of the problem. Like other insurance plans, you’ll need to meet a deductible before your insurer pays. So if you have a $1,000 repair bill and a $500 deductible, you’ll need to pay the first $500 out of pocket. The amount of homeowners insurance coverage you purchase depends on your replacement costs: the amount it would cost to replace your home if catastrophe hits. Homeowners will need to assess these costs based on the value of your possessions, or if you’ve conducted any remodeling, repairs or changes to your home that could affect its value.
A home warranty is optional and plans usually cost $350 to $500 annually. Home warranties can also come with their own deductibles, so you may end up paying $50 to $100 out of your pocket for a repair before the warranty coverage takes over. Home warranty coverage can depend on where you live, the type of property you have (i.e. prices may differ if you live in a condominium, single-family house, duplex or a megamansion), and also the type of warranty you choose.
According to Angie’s List, home warranty companies and providers generally offer several tiers of coverage:
Basic coverage that may include the cost of plumbing systems, oven ranges, dishwashers, garbage disposal, exhaust or ceiling fans, sump pump and water heaters, heating and electrical systems, built-in microwaves or Whirlpool tubs
Enhanced coverage, like central air, clothes washers/dryers, refrigerators and even garage door openers; these may cost another $100 or more annually
Optional warranty coverage, such as pools and spas, well pumps and septic systems, standalone freezers and central vacuums
When home warranties work
They can protect against expensive repairs
Sometimes warranties are simply necessary for covering overpriced repairs. Your cost for a home warranty premium may be far less than what you might pay to repair or replace a major appliance.
According to HomeAdvisor, replacing a central A/C unit can run homeowners an average $5,200, making that $500 annual enhanced home warranty seem like a bargain. If you own a house with older appliances teetering on the brink of collapse, paying for a warranty just in case something breaks can buy you some time before buying new replacement gadgets.
A home warranty isn’t just to cover recurring costs on older appliances or household parts needing repair. Homeowners who want to buy the best may be wise to take out a home warranty when populating their house with pricey or sophisticated equipment that’s expensive to fix long after manufacturer warranties expire.
They can save you time
If you’re not the handy type and/or you’re pressed for time to find a repair person, having a home warranty saves you the trouble of comparing estimates and worrying about service contracts. With a warranty, you’ll call your warranty provider about that broken laundry room pipe and they’ll take care of the rest, sending the right repair person to your home. It’s covered under your plan.
A warranty can incentivize home buyers
A basic home warranty offered as part of a home sale may be attractive to prospective homebuyers on a budget eyeing up a property whose maintenance or repair history is uncertain. As a buyer, if you get offered a plan it can’t hurt to take it and use it while it’s free of charge. Buyers of older homes may also prefer a warranty for the peace of mind it brings. Real estate agents and sellers may find an advantage in offering a prepaid home warranty as part of the home’s purchase price if it means securing a sale.
When home warranties don’t work
"Home warranties aren't worth the paper they're written on," writes personal finance and savings expert Clark Howard. The peace of mind, according to Clark, is nothing more but a mirage. Are home warranties the rip-off that Clark purports them to be? Look at some of the potential drawbacks:
Additional fees can add up
The annual cost of a home warranty isn’t where the expenses stop. There’s likely a deductible to hit,.then there are service and diagnostic fees that can tack on an added $50 to $75 per job, extending costs beyond the initial annual fee. Unless your home is rife with repairs left and right, you may not get the most value out of a warranty.
A warranty may not cover everything
A warranty may not cover everything, and it may be the repair that you need the most that won’t qualify. The Los Angeles Times cites Consumer Checkbook’s report on six different home warranty providers, none of which covered major repairs like roofs, leaky windows, basement moisture issues or chimney problems. If underground plumbing has been ruined by tree roots, for example, a warranty may not fix it.
There’s also a problem of many home warranty companies refusing to fix existing or pre-installed items that haven’t been properly maintained, or in some cases, "improperly installed." This can be a source of great consternation for many homeowners, since what’s considered properly or improperly maintained is arbitrary; even if you’ve inherited a household full of older appliances, your provider may still refuse to honor the warranty if, for example, the hot water heater or fridge were mistreated by the home’s previous owner.
Service providers may be limited
If you’re not happy with the contractor or repair company that works with your warranty provider, you may be stuck with them. While it’s convenient that you don’t have to hunt down the right handyman, plumber or fix-it company to do the work, if you’re dissatisfied with the service provider it may mean mean passing on a warranty you’re paying for. And that’s wasting money for nothing.
"If something goes wrong in your home, the warranty companies are brutally difficult to deal with," says Clark Howard. "They require you to use their contractor only. That contractor may or may not come on schedule while you're burning up in the heat of summer without A/C or freezing in the dead of winter without heat. And then you've got a deductible on top of that!"
It might just not be needed at all
A home warranty may be relatively affordable but can become a money waster over time if you never get around to using it. Rather than paying something for nothing, consider a few alternatives to save money on home repair costs:
Emphasize your savings. Prioritize saving an emergency fund. You might even open a dedicated, high-interest account specifically for saving for appliance repairs and purchases.
Read the fine print. If you’re buying a house and a warranty is offered, or, you’re considering one of your own, go over the fine print with a magnifying glass. See what the warranty covers, and what it doesn’t. Check if there are any additional surcharges, fees or deductible costs on top of your annual premium. Most of all, research the warranty company and check out reviews of their service providers; if too much negative feedback pops up anywhere from Yelp to the Better Business Bureau, it may be time to look elsewhere.
Take advantage of built-in savings. Sometimes you just need new appliances but that doesn’t mean having to pay full price for them. Seek discounts and rebates wherever possible, and look for items on sale. That fridge on the sales floor may be an outgoing model and discounted heavily. (Researching sources like Consumer Reports can fill you in on which gadgets or appliances are becoming obsolete or being replaced.) If products come with initial warranties built into the sticker price, you may be covered for free.
Remember to negotiate. No home shopper should take anything at face value. If you’re looking at a home with construction or gadgetry that’s aged, don’t hesitate to negotiate it into the final sale price of the home -- or haggle with the seller on providing a limited home warranty to you, free of charge.