Many first-time homebuyers, even those who may have studied up on some of the hidden costs of homeownership, are thrown for a loop when offered a home warranty. After all, didn’t you just sign up for homeowners’ insurance? Is a home warranty worth it or something to skip out on in order to skimp and save?
As compared to homeowners’ insurance, a home warranty is a similar financial stopgap. Like an insurance policy, investing in a home warranty upfront helps offset larger costs down the road, like replacing your dishwasher or reconfiguring the plumbing.
For most homebuyers, determining whether a home warranty is worth it will be a personal decision. Before signing on the dotted line, though, you’ll want to develop a thorough understanding of how home warranties work as well as the pros and cons of investing in one.
What is a home warranty?
A home warranty is a contract between the homeowner and the warranty company. While policies will differ depending on market, company and contract, it typically dictates maintenance, repairs or replacement of any qualifying faulty elements in the home. These might include the plumbing, HVAC system or even large appliances.
It’s important to note that a home warranty is not the same as homeowners insurance. While both offer protections, their qualifying repairs differ greatly. For example, homeowners’ insurance typically covers repairs and replacements needed due to a natural disaster or a crime. It might come in handy after a storm, robbery or other unforeseen event. Home warranties, on the other hand, can cover elements of the home that give out due to age or daily wear and tear. This might include a faulty dishwasher or old water heater.
Said another way, issues covered by your home warranty are typically more predictable than those covered by homeowners’ insurance. You may be able to approximate when the aging HVAC system will give out but predicting a particularly severe storm might prove more difficult.
How does a home warranty work?
Obtaining and maintaining a home warranty policy is like opting into other insurance coverages. You’ll pay an annual premium based on the size of your home and any additional products or services you might choose to bundle. Then, if a qualified system or appliance breaks down, you turn to the home warranty company. You’ll pay a deductible for each applicable repair or replacement, which the company will then manage.
Specific norms and processes will depend on your individual home warranty company and policy. Understanding the language and expectations outlined in your contract will be critical in protecting your home and making the most of your money, so don’t be afraid to ask questions or clarify language.
Benefits of a home warranty
Of course, one of the primary reasons homeowners find that a home warranty is worth it is peace of mind. While some owners are perfectly comfortable with a wrench in their hand, others are far less handy. Those with home warranties can feel more confident that if a major system or appliance breaks down, a professional who can repair or replace it may be well within reach.
In the same vein, home warranty companies can offer a ready-made team of home repair professionals. After all, if you’re new to the neighborhood, you might not have a go-to plumber just yet. Contracting with a home warranty company that you trust can provide easier access to quality tradespeople. In fact, if you want to confirm that you’re receiving the best of the best, you can always ask to see credentials for any repairmen that the home warranty company might send. As this is their bread and butter, their staff should be true professionals.
A home warranty can also help with financial planning, particularly if you’re purchasing a home with older features. For example, if you’re confident that the outdated washing machine won’t see the next year, you can begin to plan around a breakdown. You’ll know exactly what your deductible is and then may have time to budget and save up. Then, when it does officially give out, you’ll have cash in hand, and it’ll be far less than the sticker price of a brand-new machine.
Drawbacks of a home warranty
Unfortunately, there are some cons to hiring a home warranty company as well. As you’re buying the warranty, there is a monetary cost associated. This figure will depend entirely on your market, home and personal financial situation, but you can typically expect to pay between $214 and $1,662 per year. The average annual cost is roughly $900. While that may seem steep, particularly after paying for private mortgage insurance (if you need it), closing costs, homeowner’s insurance, taxes, other expenses like HOA dues and, of course, the home, you’ll want to run the numbers in relation to your particular property. For example, if you can safely expect to replace a few major appliances this year and the HVAC system next, you might end up spending far more than $900 during the first two years of homeownership. On the other hand, if your home (or its major appliances and systems) is on the newer side and breakdowns are less likely, planning to pay out-of-pocket if issues arise might be a safer bet – although it might require more budgeting discipline.
Like other insurance options, claims can sometimes be denied by the home warranty company. You may need to make a practice of properly documenting all regularly required routine maintenance, as a catalog of work is often required. If you’re just moving in, this may be a topic to discuss with the previous owner before deciding whether you’d like to move forward with a home warranty. If they can’t provide historical maintenance records, the decision might be made for you.
If you’re an interior design buff, you also may take issue with a home warranty. Owners often don’t get a say on the style, make or model of their replacement appliances. So, if you can’t stand the thought of a black fridge in your white kitchen, you might consider passing on this kind of policy.
Finally, there could be hidden costs that arise throughout the working relationship. You’ll need to become crystal clear on what is and isn’t covered, as well as any relevant fees or upcharges you might see. An open line of communication with your representative throughout the life of your policy will be critical.
Is a home warranty worth it?
Home warranties can provide peace of mind, a ready-made team of home repair professionals, and a more predictable financial outlook. Unfortunately, they also come at a cost. Deciding whether a home warranty is worth it will be up to each individual homeowner. So, is a home warranty worth it? The answer is up to you.
Published on May 31, 2022
