Buying a home is one of the most expensive processes a person can go through and often leaves people strapped for cash at the end. From down payments and closing costs to appraisal fees, it takes a substantial amount of money to successfully complete a home purchase.
Take it one step further and imagine for a moment a buyer moving into their new home after spending a lot of money and an issue arises in a major appliance such as the air conditioner going out, or the dishwasher stops working. This is not exactly something a new homeowner wants to face after spending so much time and money on the purchasing process.
Purchasing a home warranty can help provide peace of mind for these potential financial burdens as they cover the repair and replacement of big ticket items. Below is an overview of what a home warranty and how much they cost.
What is a home warranty?
A home warranty is separate from the homeowners insurance policy in that it’s a service provided by a home warranty company that covers the repair or replacement of major aspects of the home such as plumbing, kitchen appliances, electrical, heating, and air conditioning systems. Homeowners insurance policies cover loss incurred if the home was affected by a fire, flood, tornado, or theft.
Home warranty companies have agreement with local service providers and when something breaks covered by the warranty, the homeowner calls the warranty company. The warranty company then calls one of its service providers to examine the issue and determine if it’s covered.
Once it’s deemed that the warranty covers the problem, and the work is completed, the homeowner only pays a small service fee to the home warranty company rather than the entire cost of the repair. This helps the homeowner not have to tap into their emergency fund or put a large expense on their credit card.
Will a homeowner warranty pay off?
On average, it costs between $350 – $600 a year to buy a home warranty and can get more expensive the more coverage is desired. In addition to the annual premium, the service calls costs about $50 – $125 a year.
Those costs are nothing compared to what it could potentially cost to make major home repairs. Without a home warranty, a homeowner could potentially spend hundreds or thousands of dollars repairing or replacing major appliances or systems in the home.
If there isn’t an emergency fund to cover these items, them a home warranty makes even more sense.
According to HomeAdvisor, these are some of the costs associated with replacing appliances in the home, of which a home warranty would cover.
- Refrigerator – $425 – $10,000
- Dishwasher – $330 – $1900
- Stove and Range – $410 – $7,500
- Microwave – $50 – $2,300
- Range Hood – $50 – $2,500
- Furnace – $3,800 – $10,000
- A/C – $3,000 – $7,500
These numbers have large sticker shock and could certainly be mitigated by purchasing a home warranty.
Who should buy a home warranty?
Buying a home warranty is important if a person is purchasing a home that is previously owned by someone else.
Another reason a person should buy a home warranty is if the home inspection comes back showing that the home’s appliances are nearing the end of their life span.
People with less than 6 months worth of expenses saved in an emergency fund also might want to consider a home warranty. The costs of the repairs mentioned above could wipe out a significant chunk of money for a lot of people.
Additionally, a home seller might offer a home warranty as part of the sale of the home to sweeten the deal a bit for a potential buyer. A home warranty for a buyer provides peace of mind for at least a year once they move into the property.
It’s important to read the fine print to ensure it’s clearly understood what a home warranty will cover, what it will not cover, and how long the coverage lasts.
Who should not buy a home warranty?
Home buyers that purchase a new construction home usually get some sort of home warranty from the builder that covers workmanship and plumbing, electrical, heating, and cooling, which last for up to 10 years.
Appliances are not generally covered by the builder but new appliances generally come with their own warranty. So it’s not usually worth it for a homeowner that buys a new construction home to purchase a home warranty.
Additionally, some credit cards offer extended warranties with new appliance purchases. So if a person is remodeling their home and pays for everything with their credit card, there might be a built in warranty in some cases.
Pros and cons of a home warranty
It’s important to evaluate in detail what is and isn’t included in the home warranty. Below are some pros and cons of having one.
Pros of a home warranty
- Peace of mind: A warranty can provide peace of mind if a person is buying an older home or doesn’t have any emergency savings.
- New to an area: it’s unlikely they will have relationships with contractors or repair specialists. The home warranty takes care of this issue because the warranty company reaches out to the contractors on behalf of the homeowner.
- Lack of DIY skills: One of the main costs of home repair is the cost of labor. Some people are able to figure out how to make repairs themselves while others do not have this skill set.
Cons of a home warranty
- Dollar limits: Home warranty companies impose dollar limits as to how much money can be spent per year on repairs. If several big ticket items fail at once over the course of a year, then the homeowner might be out of luck.
- Claims can be denied: If an item hasn’t been properly maintained, a warranty company may deny the claim. Be sure to read the section of the contract that discusses what is considered improperly maintained because it may be difficult to provide records to the company if a person has recently occupied the home.
- Fix or replace: Home warranty companies decide whether to fix or replace the system, which a homeowner may not agree with.
- Other circumstances: There might be certain circumstances in which a home warranty does not cover the repair or replacement of an item, such as a power surge.
Home warranties can be a life saver for many homeowners or completely unnecessary and it’s important to weigh the situation and decide if one is needed. If one is needed, be sure to read reviews about the company and check with the Better Business Bureau. In addition to researching companies, homeowners should read the fine print of the contract to ensure there isn’t anything that might prevent the warranty company from covering the cost of a repair or replacement.