Unlike a homeowner's insurance policy, which covers losses to your house and its content due to fire, theft, and other causes, a home warranty is a service contract that covers servicing, repairs, or replacement of certain home appliances and systems due to normal wear and tear.
Individual manufacturer warranties are offered on nearly every major purchase people make, including home appliances, building materials, and household systems. You can extend many of these warranties if you believe the replacement and repair contract is in your best interest. Or, if you're a homeowner, you can consider purchasing a "home warranty." By doing the math on the terms, cost, coverage, and deductibles, you can decide if a home warranty is right for you.
What are Home Warranties?
A home warranty is an optional service contract that covers the cost of repairs and replacement on home systems and appliances such as:
- plumbing and electrical,
- heating and cooling,
- washer and dryer,
- and kitchen appliances.
Homeowners also have the option, for an additional fee, of course, to add coverage for a swimming pool, hot tub or spa, external well, sump pump, septic system, or central vacuum.
Coverage generally includes normal wear and tear of the system or appliance.
Importance of Understanding the Pros and Cons Before Purchasing
Unlike car or general homeowner’s insurance, a home warranty is not typically required. That means it involves additional coverage beyond what lenders or insurance laws mandate. As a purely optional expense, homeowners will need to weigh the benefits against the cost. Knowing whether a home warranty is worthwhile can be something of a challenge because it involves possible future repairs.
Pros of Extended Home Warranties
Although called “home warranties,” these agreements function similarly to insurance policies. Something needs to be repaired or replaced, and homeowners don’t need to pay the total amount out of pocket. The key difference is that the issues are not related to damage due to floods, fire, or severe weather. These rank among the top benefits of having and renewing a home warranty.
1. Coverage of Expensive Repairs and Replacements
Property owners can save thousands of dollars in the event something fails. For example, a sagging roof that requires replacement can run upwards of $4,000 for what contractors call a "square." A completely new roof can cost more than $50,000 in some cases.
2. Budgeting for Unforeseen Home Repairs
Having a service contract to cover repairs helps working families budget effectively. Based on the home warranty, you pay only a fraction of the overall cost of repairs or replacement.
3. Reduced Stress and Worry About Unexpected Breakdowns
A home warranty helps people sleep easier, knowing they are covered should the HVAC or plumbing system fail. Without a home warranty, it’s not unusual for property owners to take out a loan.
4. Access to a Network of Trusted Service Providers
As a type of service contract, a home warranty helps weed out unreliable contractors. Companies that the home warranty provider approves are usually certified professionals. This facet helps narrow the field and ensure you receive quality work.
5. A Streamlined Process for Repair Requests and Service Scheduling
Like an efficient insurance claim, having a home warranty helps assure contractors they will be fully compensated. Although community members who need repairs and appliance replacements may be good for the money, contractors may feel more comfortable prioritizing the job when a service contract is in place.
It’s also important to keep in mind that an extended home warranty can buoy real estate values. If you can transfer it when selling your home, it adds quantifiable value.
Cons of Extended Home Warranties
Property owners are usually pleased they have a service contract when something goes awry. But as time marches on, the annual cost adds up. These are reasons why a home warranty might not be suitable for you.
1. Upfront Fees and Monthly Premiums
The cost of securing a home warranty and renewals does add up over time. If the home was well-constructed, the service contract might go unused. That means you spent money solely for peace of mind.
2. Deductibles and Service Call Fees
Like a homeowners insurance policy, a warranty typically includes deductibles. Depending on the deductible amount, using the service contract might not be dollar-wise. Again, it could be money better spent elsewhere.
3. Duplicate Coverage
Why pay additional for something you may already have? If you purchase a new home, the appliances most likely have a manufacturer's warranty. If you buy new appliances using a credit card, an additional year of coverage over the manufacturer's warranty is usually included.
4. Exclusions for Pre-Existing Conditions and Certain Types of Repairs
Property owners often discover home insurance policies do not cover flooding and "wind" damage from hurricanes and tornadoes. For this type of coverage, homeowners must purchase additional riders. If a home warranty excludes items you are concerned about, it may not be a good bargain
5. Restrictions on Specific Home Components or Appliances
You may not have a say on which model you receive. If provided with an option, it may be a lower quality.
Consider what the warranty will pay for before selecting or extending one. If major components such as HVAC and state-of-the-art appliances are excluded, you might be better served putting the money in a rainy-day account.
6. Requirement to Use Authorized or Approved Contractors
While restricting contractors to only certified firms helps ensure quality control, it may also be an impediment. In a small town or community where reputation matters, the warranty could exclude the people you want to work on your home.
Working with a service provider can also lead to unnecessary red tape. Delays can occur when preferred contractors are not available. Other terms and conditions may make it less than useful in the long run.
Factors to Consider When Deciding on a Home Warranty
Homeowners should consider the pros and cons of making an informed decision on purchasing or extending a home warranty. These are questions to consider when determining whether to buy the service contract or invest your hard-earned money elsewhere.
• As a homeowner, what are your needs and budget flexibilities?
• How old are the major appliances and systems?
• Are appliances and systems nearing their life expectancy?
• Does the home warranty service contract provider enjoy a good reputation?
• Does the warranty provider offer effective customer service?
When conducting your due diligence, weigh online reviews and ratings, and compare coverages and costs.