Owning a home is the dream, right? That’s true in so many ways, but homeownership also comes with financial challenges. For many people, a home mortgage is one of their most significant life investments.
Aside from the mortgage, other prime expenses are systems and appliances in your home. What happens when they break down? When you were renting an apartment, you’d call the landlord to report your broken refrigerator. Now, the broken refrigerator is your problem, with repair costs pulled from your bank account.
Have you heard about home warranties? A home warranty gives you some protection to prevent those surprise, sky-high outlays by insuring your home’s appliances and systems when they stop working correctly due to normal wear and tear.
Read on to learn more about home warranties. If you think purchasing one is the right choice for you and your family, you can save money with sign-up promotions.
In This Post:
What Is a Home Warranty?
A home warranty is a service contract that covers systems and major appliances for a stated period of time, usually one year. Your coverage will typically apply to your:
- Electrical system
- HVAC system
- Water heater
Some home warranties may cover items like washers and dryers, pools, and garage door openers for an additional premium, while others may not. You should remember that each brand’s coverage is a little different, so be sure to read the fine print. Carefully review your options to make sure that the warranty offers the protection you need.
You may think a home warranty sounds similar to your homeowner’s insurance policy. It is similar in some ways. As with a homeowner’s policy, your home warranty will feature a premium and deductible. If you need to access coverage, you’ll submit a claim. You’ll also need to carefully review the fine print to see if certain items and situations are included.
The important difference between a homeowner’s policy and a home warranty is the coverage. A homeowner’s policy protects your residence itself, as well as some personal contents, against loss from fire, certain weather events, and theft. Your home warranty protects many appliances and systems in the home from the normal wear-and-tear of everyday use.
How Does a Home Warranty Work?
If you’ve ever submitted a claim against your auto or home insurance, you’ll find that a home warranty works similarly.
Here’s one example: Your alarm clock rings in the morning. Still half asleep, you stumble into the bathroom. When you step into the tub and turn on the water, you get hit with an icy-cold blast. After years of reliable service, your water heater has decided to die.
With a home warranty, your next step is to reach out to contact your home warranty provider, who will arrange the appropriate service from its list of approved appliance repair partners (service contractors).
With most home warranty contracts, your obligation will only be a set cost for the service provider’s initial house call service fee. After the repair service comes to your home and evaluates the problem and communicates back to the warranty company, it will, in turn, confirm or deny coverage under your policy. If covered, it will hire the contractor to perform the necessary repair or replacement at no further expense to you, up to the coverage maximum limit.
Let’s say your stove wears out and can’t be fixed. The value of a comparable new stove is USD$1,200, but your warranty limit is USD$1,000. The provider will cut you a check for $1,000, and you will pay the remainder, plus the, say, USD$75 fee for the service call. If the stove costs less than USD$1,000, you are only responsible for the service call fee. And now you’ll have a new stove.
How Much Does a Home Warranty Cost?
A home warranty’s cost will vary depending on the provider’s level of coverage, as well as the payment limits. When shopping for warranties, be sure to perform a side-by-side comparison of potential providers to make sure you’re receiving the best value.
Typically, the base cost of a warranty plan for your home will range from $300 to $600 per year. If you add on optional or extended coverage for particular appliances not included in the base, the cost will go up. Billed monthly, even a top-of-the-line warranty with all possible bells and whistles usually runs less than $100 a month.
Is a Home Warranty Worth the Money?
So many people are on tight budgets these days. When discussing home warranties, the question inevitably comes up: Is a home warranty worth the money?
Think about it this way: a high-end policy may cost $1,000 a year, which equals about $84 each month. A new refrigerator may run upwards of $2,000. If you need to replace a broken refrigerator in a hurry, your home warranty will pay for itself. If you’re talking about new central air conditioning or a new electrical system, you’ll be thrilled to have that home warranty.
If you’re fortunate enough not to use your home warranty, or if there are items that your warranty doesn’t cover, you may think it’s not worth the price. Compare it to health insurance or homeowner’s insurance: you may rarely need it, but if those major breakdowns occur, could you afford to pay out of pocket? If not, a home warranty can be a source of security.
Only you can decide what you can afford and what’s worth it for your home and your family. If you decide to purchase a home warranty, our best advice is to consider reviewing competing home warranties carefully to see what is and isn’t covered by each one—and to compare the deductibles or service fees and payment limits.
Make sure you’re comparing apples-to-apples when it comes to prices. If your washer and dryer are not covered, or if your furnace isn’t covered, how much more will it cost to include them? Make a list of all the appliances and systems in your house and then create a comparison checklist to see which ones are included in each company’s policy, then compare.
Who Should Buy a Home Warranty?
Home warranty providers would argue that everyone needs a home warranty. As a consumer, you may not feel the same. Here are some questions to ask to help you decide:
- How old are each of the appliances and systems in your home?
- Do you think any of these items are at risk of breaking down?
- How would you rate the condition of the appliance and systems in your home—like new, good, fair, or poor?
- Does the original manufacturer’s warranty still cover these products? (If they’re more than two years old, probably not.)
- What would the replacement cost for these appliances and systems be?
- How much savings do you have in an emergency fund to cover any major repairs or replacement of your household appliances and systems?
Once you gather this information, take a look at the potential lifespan of your appliances and their replacement costs. If you expect that one or more big-ticket items are aging and may be prone to repairs, you should probably purchase a home warranty. Even if you don’t use it, the home warranty can alleviate some stress and worry about the loss of older appliances and systems. Similarly, if you don’t feel confident in your ability to pay for repairs or the replacement of big-ticket items without incurring credit-card debt, a home warranty may be a sound choice.
When to Skip a Home Warranty
A home warranty can provide peace of mind. However, in certain cases, you may decide to skip the purchase.
If you move into a brand-new home with all new appliances and systems, or if you do a full remodel, a home warranty probably is not necessary. The original manufacturer’s warranty should cover new items. After they go out of warranty, a home warranty may give you peace of mind.
You should also look at the other side of the coin. If you have a very old system or appliance that’s already severely damaged or hasn’t been adequately maintained, your home warranty may not cover the replacement. Be sure to read the terms of the potential policy to see what it excludes.
In summary, if your products are new and covered by a manufacturer’s warranty, or if you have a good-sized emergency fund set up for household repairs, you may decide to say no to the home warranty.
Pros and Cons of Home Warranties
If you’re still trying to decide if a home warranty is right for you, let’s take a look at some pros and cons.
Pros – Home warranties can:
- Provide you peace of mind that you will not face a tremendous bill when you are low on funds
- Help replace appliances or systems that break down due to normal, everyday use
- Cost less in monthly payments than the price for a replacement item
- Pay for themselves if you need many repairs or replacements
Cons – Home warranties have the following disadvantages:
- The ‘fine print’ of the policy may exclude certain items from coverage
- The home warranty provider chooses the contractor rather than you choosing
- You pay a set amount out of pocket for service calls, as well as costs above the warranty limit
- Monthly payments may seem like an unnecessary expense if you don’t use the coverage
As you learn a bit more about home warranties, you can decide if the purchase makes sense for your home and your family. Are home warranties worth the money? If you use one to cover a major replacement expense or quite a few repairs, it certainly will be worth it.