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Q: I’m shopping for my first home, and while I am certainly planning to get homeowners insurance, I’ve heard of home warranties, too, and aren’t sure whether I need one or not. What exactly is a home warranty, and is a home warranty worth it?
A: A home warranty can feel like an extra expense at a time when you’re making one of the biggest investments of your life. Deciding whether to purchase a warranty is simple with something like an appliance or a vehicle; you’ll need to calculate the value of the item and the cost of the likely repairs (though there are certain purchases where an extended warranty is almost always recommended). A home warranty is similar, since the potential value of a policy can be measured against the potential savings you could see if a covered appliance or system fails.
Spending money on repairs or replacements for appliances or whole-home systems can be seen as an inescapable expense of homeownership. But a home warranty acts as a service contract that covers these major home systems and appliances, making it a worthwhile purchase in many cases. Learn more about home warranties to decide if purchasing one is a good choice for you.
Home warranties offer homeowners extra protection against appliance and whole-home system failures.
Home warranties are often mentioned during the process of buying or selling a home, but they are not always widely understood. So what is a home warranty, and what does a home warranty cover?
The best home warranties can cover whole-home systems and appliances that fail as a result of normal wear and tear over time. Commonly covered systems include heating, ventilation, and air conditioning (HVAC); plumbing; water heaters; electrical wiring; and washers and dryers. If a system or appliance needs repairs or replacement, homeowners can file a claim and will only pay a predetermined service call-out fee. This helps protect homeowners from the brunt of the cost, and their total cost will be far less than it would have been without a home warranty.
It’s important that homeowners are aware of exactly what is covered under a particular home warranty, and what might cause coverage to be invalidated. For example, if a homeowner attempts to fix their water heater themselves before making a claim, the home warranty company may refuse to cover subsequent repairs.
It’s possible to buy a home warranty at any time, but most home warranties are acquired during the house-selling process. A new owner may purchase a warranty as protection for their new investment, or a seller may include it in the contract as an incentive to buy.
A home warranty’s worth is only as good as what it covers.
This is the trickiest part of deciding whether to purchase a warranty and how to value a warranty offered by a home seller. According to Jessica Fields, vice president and chief sales officer at home warranty provider American Home Shield, “It’s important to prioritize coverage of systems that impact the key functions of your home or any components which may lead to safety issues, such as electrical systems. The good news is, homeowners can customize their plan and can opt to include larger systems, like a pool or spa.”
As with any warranty, there are exclusions—possibly in very small print—and a lot of details to read carefully at a time when home buyers are already reading paragraphs full of details. Homeowners can expect to find and consider the following information in a warranty they’re considering:
- The systems and appliances that are covered by the policy
- The systems and appliances that are not covered by the policy
- The conditions under which the warranty is voided (for example, transfer of ownership, failure to maintain, attempted DIY repairs, etc.)
- The percentage of a repair or replacement that will be covered, and any policy limitations
- The cost of service visits
After the list of covered systems, the most important section for a home buyer to read is the conditions that will void their home warranty. The new warranty won’t help the buyer replace the furnace if the coverage is voided as a result of the previous homeowner neglecting to clean or service the furnace in the last 10 years. In addition, it’s important for a homeowner to determine whether a DIY fix will invalidate coverage, because it will help them determine when to call in a professional to assess problems rather than trying to do quick repairs that might end up costing more later.
A home warranty protects both a home buyer and a home seller.
Most questions about home warranties come from home buyers, and rightly so. Many home warranty plans are marketed to new buyers to protect their investment, and many sellers choose to offer them to buyers to sweeten the deal on an older home. But a warranty can provide a great benefit and excellent protection to the seller as well.
A homeowner who wants to sell will need to make decisions about what to upgrade or repair, what to leave as-is, and what asking price fairly takes all those aspects into account, along with balancing these choices against the cost of a new home. Once that difficult work is done, the seller is at the mercy of the home and its systems. Should something fail, the seller will have to repair or replace it in order to continue with the sale, or they might need to adjust the asking price to compensate for the money the buyer would need to pay to fix the issue.
Sellers may find themselves in a precarious situation if they cannot afford to repair a major system failure that happens while the home is on the market—or worse, under contract. As Fields explains, “In cases where potential buyers are concerned about the age or condition of home systems and appliances, adding a home service plan can help move the deal forward. Once clients understand the budget protection that home service plans provide for covered home system and appliance component repairs or replacements, they’ll likely have fewer concerns about potential unexpected breakdowns due to normal wear and tear during the contract period.”
If the buyer’s home inspection uncovers a necessary repair, this often results in a tedious negotiation on who will pay. However, if the repair is already covered under a home warranty, the seller can offer to cover it while only paying a service fee. Not having to be responsible for those repairs may seal the deal for a buyer who was on the fence, making the scenario a win-win for everyone.
In addition, in many states new homeowners have up to a year (in some cases, longer) to ask the seller to pay for substantial portions of repair and replacement of systems that fail shortly after the purchase. A sellers home warranty can protect the seller by covering the majority of those types of costs, since selling a home is complicated enough without having the worry of unanticipated expenses after the sale.
A home warranty can supplement homeowners insurance.
There is some natural confusion about the function of homeowners insurance vs. a home warranty since both are intended to protect against unexpected catastrophes that can befall a home. Homeowners insurance covers damage and theft: If a home is hit by a falling tree during a storm, is torn apart by a tornado, or is the target of a break-in, homeowners insurance will typically help restore the home to its former state. However, homeowners insurance specifically excludes system failures and appliances that stop working as a result of age, improper maintenance, or normal wear and tear. Ordinary system failures are just as likely (or more likely) to occur than the types of disasters covered by insurance.
This is where a home warranty can be a good investment. If the home’s systems have been regularly maintained and the homeowner can demonstrate that they’ve been in good working condition, the warranty can cover a significant portion of the repair or replacement of a boiler that’s stopped working, a water heater whose thermocouple has failed, or a gas oven that won’t ignite.
Sometimes coverage is needed from both a warranty and insurance for the same issue. For example, if a home’s electrical wiring malfunctions and causes a fire, both the fire damage and the replacement of the home’s wiring will need to be paid for. A home warranty will typically cover the cost of the electrical repair, while insurance is likely to cover the fire damage. Together, a home warranty and homeowners insurance protect homeowners from the brunt of any unexpected and significant expenses. As Fields says, “A home service plan is the perfect complement to your homeowners insurance, as it provides repairs or replacement at a lower cost or no additional cost when normal wear and tear causes appliance or system breakdowns—which insurance won’t cover.”
Home warranties can be affordable and can help homeowners save money on repairing or replacing whole-home systems or appliances.
In order to be worth the cost, the best home warranty plan will strike a balance between affordability and ample coverage. An effective plan can relieve homeowners of the anxiety that at any moment a costly repair could set them back financially. In the event that a covered appliance or whole-home system does fail, the warranty can save homeowners hundreds or thousands of dollars on repairs or replacement. According to Fields, “Maintenance and repairs are an inevitable part of homeownership and yet according to a recent survey, one in four homeowners do not have a budget set aside for this purpose. One of the best ways to avoid a situation where you have to choose between repairs is to plan ahead with a home service plan that covers your home systems and appliances when breakdowns or damage occurs due to normal wear and tear.”
A home warranty costs between $264 and $1,425 per year in many cases, with homeowners paying an average of $600 annually. Many home warranty companies offer a base plan with general coverage and optional add-ons for additional appliances or systems that homeowners would like to have protected. Homeowners can work with their home warranty provider to come up with a plan that suits their needs and does not break the bank. The relatively low cost of a home warranty is well worth the peace of mind of protecting an investment in a new home.
Homeowners are never required to have a home warranty policy, but in some cases, it’s a good idea.
A house might be close to perfect, but there are usually a few flaws. For example, the driveway might be extremely long, and the cost to repair it if it cracks could be worrisome for homeowners. Or perhaps the home uses a well system instead of city water, and the buyer knows nothing about maintaining or repairing it. A home warranty can push these concerns out of the way and open the door for buyers to purchase a house they love without worrying about specific maintenance issues.
A home warranty can be especially helpful in the case of older homes. It can also help in situations where several systems are aging simultaneously; while in good condition at the time of purchase, these systems could potentially all fail at the same time. A home warranty can protect sellers from claims after the house has sold or during the sale—the last thing a seller wants to face is the expense of repairing a broken sewer line just before they sign the contract to sell their home.
Purchasing an older home is an obvious reason for buyers to get a home warranty, but it’s not a bad idea for buyers of new-construction homes either. In theory, a brand-new home’s appliances and systems should not have any damage or wear. But the systems in a new-construction home are untested, and any defects and installation errors have yet to be discovered. After shelling out a significant sum of money on a new house, a buyer may not be prepared to pay for these kinds of repairs.
Buyers also should not assume that the builder warranty will protect them from these expenses. Builder warranties do not have the scope of a home warranty and are also not always transferred to the buyer when a home is sold. It’s advisable to review exactly what is already covered and make note of any appliances or systems that may require additional protection. Homeowners may not need a home warranty in the same sense that they need home insurance, but they may find it just as worth it.
Homeowners who opt for a home warranty will want to read the fine print to know how they’re covered.
The best home warranty companies, such as American Home Shield and Choice Home Warranty, will clearly state the terms of a plan prior to purchase. But before purchasing a home warranty, it’s advisable for homeowners to read the contract carefully and do some investigation into the company offering the warranty. According to Fields, “Homeowners should look for a well-established provider committed to transparency in coverage terms, service procedures, and pricing. It’s important to also understand how a provider fulfills its service requests.” Many times, consumers complain that a warranty wasn’t worth the cost because they didn’t get the payout they were expecting, but the exclusion in which they were caught was plainly stated in the contract.
Homeowners can check the Better Business Bureau and the state Attorney General’s office for complaints about the company. In addition, many states require home warranties to be registered or licensed with their insurance regulators. State regulators can be found by checking with the National Association of Insurance Commissioners (NAIC). Potential customers can read through the complaints and any actions taken by the regulatory boards, which can be instructive and can help buyers avoid unreliable companies.
Finally, homeowners can check the distinction between system and appliance repair and replacement: They may think the whole system needs to be replaced, but the warranty company may choose to repair it instead, and the homeowner may have no control over the company doing the work or the type and brand of the replacement parts.
In general, a home warranty is worth the cost for many homeowners who want to have peace of mind when it comes to their home’s appliances and systems.
For those selling or buying a home, or for homeowners who are simply concerned about coverage, a home warranty is an excellent way to protect what for many people is their biggest investment—their home. It may be unpleasant to think about system failures or damages that haven’t even happened yet. When everything is working in a home, it’s natural to question, “Are home warranties worth it, or are they a waste of money?” But in the event that a major repair is needed, homeowners will thank their past selves for their foresight.
It’s impossible to prepare for everything that can possibly go wrong with a home. But a home warranty covers the features that keep a home safe and comfortable to live in. For the relatively low cost of an annual premium, homeowners receive peace of mind, which is priceless.
