Should You Buy a Home Warranty? The Pros and Cons
By Gary Sprague
Published: May 18, 2018
Home warranties provide protection if a home's systems or appliances break down unexpectedly. While a home warranty may sound similar to home insurance, they are actually quite different.
If you are looking into purchasing a home warranty, there are several things you should know:
- What is the difference between home insurance and a home warranty?
- What does a home warranty cover?
- When does buying a home warranty make sense?
- Cost and length of coverage
- Can you choose the contractor to perform the work?
What is the difference between home insurance and a home warranty?
While home insurance and a home warranty are both designed to protect the homeowner from loss or damage, they are very different. Home insurance typically covers the house and your belongings if damage or loss is caused by fire, theft, or other covered hazard. An example of something home insurance covers is a tree limb crashing through your roof during an ice storm.
A home warranty, on the other hand, covers repairs and replacements of home appliances and systems that fail due to wear and tear, protecting against unexpected repair bills. If you wake up to frosty windows because your furnace stopped working in the middle of the night, this would be covered by a home warranty.
What does a home warranty cover?
A basic home warranty typically covers most appliances, including ovens, dishwashers, garbage disposals, water heaters, and heating and electrical components.
Most home warranty companies offer optional or "enhanced" plan levels, that cover home systems, such as heating and air conditioning systems and ductwork, plumbing systems, and electrical systems.
Companies also offer "Combo" or combination plans which cover a combination of both appliances and systems.
Finally, premium plans cover items such as dishwasher racks and door seals, pools and spas, septic pumps, etc.
When does buying a home warranty make sense?
Imagine that your furnace died yesterday, and a contractor just quoted you $8,000 to replace it. Should you rush out and buy a $500 home warranty to solve the problem? The answer, unfortunately, is: No -- warranty providers won't cover pre-existing problems, and they typically won't cover any repairs until a 30-day waiting period has ended.
However, once the immediate crisis has passed, you may want to consider buying a warranty so that you won't be in the same boat next time. Homeowners living in a home with appliances and systems that are getting old and have seen their share of use could benefit greatly from a home warranty. Also, buyers of an older home may sleep a little easier knowing that any unexpected repair will be covered.
Home sellers and real estate agents are also among those who purchase home warranties. For a home seller, a transferrable home warranty may serve as incentive to purchase the house. A real estate agent may purchase a home warranty when representing a seller as protection against any problems while the home is for sale. A real estate agent may also buy a home warranty when representing buyers as an incentive to purchase the home.
Cost and length of coverage
A home warranty is typically a one-year contract, paid in a lump sum. A homeowner can choose to renew the warranty every year by paying the annual fee.
Costs of a home warranty average about $500 annually for a basic plan, and an average of $100 to $300 more for enhanced or optional coverage.
It's important to note that, even with a home warranty, there is still a predetermined service fee charged to the homeowner for every service call. The fee ranges according to company but is usually between $60 and $125 per call. This may seem like a high fee, but considering that one repair can cost hundreds, or even thousands of dollars, many homeowners find the fee to be worthwhile. You'll want to check with different warranty companies to find if there is a charge for repeat visits regarding the same issue.
When there is a problem, the homeowner contacts the warranty company, who will send a repair technician of their choice. Most warranty companies have a large network of service providers. The homeowner cannot choose their own contractor to do the work. Home warranty companies require the use of their own providers to make sure the work is done correctly and for the correct fee.
Types of home warranties
There are several types of home warranties:
- Homeowner warranty – This is a home warranty purchased by the homeowner. This is for homeowners who have owned the home for at least 90 days and are not planning to sell their home. These warranty often take up to 30 days from date of purchase to take effect.
- Renewal warranty – Because most home warranties last one year, a renewal warranty is simply a warranty that is renewed annually.
- Seller home warranty – This is for homeowners listing a home for sale and covers the property during the listing. This warranty can serve as a buyer's incentive because it can be transferred to the buyer at closing.
- Buyer conversion warranty – Transferred from the seller to the buyer, this warranty is effective immediately.
- Buyer direct warranty – This can be purchased by a home buyer or as an incentive by the buyer's real estate agent. It becomes effective on the closing date and can be purchased up to 90 days after a closing.
Newly constructed homes often come with a one-year warranty covering appliances and systems, as well as a 10-year structural warranty, usually covered by the builder. Older homes, however, come with no such guarantee.