The Home Warranty: Scam or Savior?

There are dozens of home warranties on the market today. If you check out consumer review sites like the Better Business Bureau and Trustpilot, you’ll find many of them are the subject of a complaint after complaint. Criticism over coverage, claims, and customer service. You name it. And yet, for many people home warranties are life-savers—at least financially speaking. And they make sense for a lot of homeowners. How do you find the best home warranty and once you’ve picked one, how can you get the most out of it? Here’s a brief guide to show you the way.

First Things First: What is a Home Warranty?

Home warranties protect homeowners against unexpected expenses when their homes need various kinds of repairs. In some ways, home warranties are structured similarly to homeowner’s insurance policies. You pay fees for a home warranty, which are akin to premiums. You file claims when something goes wrong in your home. You pay a service fee when a contractor visits your home to complete a repair, which resembles a deductible. Both home warranties and homeowner’s insurance have coverage limits. But to be clear, a home warranty isn’t the same thing as a homeowner’s insurance policy. 

For one thing, your mortgage lender will require you to carry homeowner’s insurance. It won’t require you to buy a home warranty. Homeowner’s insurance and home warranties cover different things. Here’s one example. If someone slips on your bathroom floor and is injured due to an old pipe bursting, a home warranty won’t cover his or her medical bills. Only a homeowner’s insurance policy will do that. But a homeowner’s insurance policy won’t cover the cost of repairing your plumbing. Only a home warranty will do that. So many homeowners decide they need both.

What Do Home Warranties Cover?

Most home warranty companies offer two kinds of coverage: home systems and appliances. You can select either type of coverage or both. Naturally, plans that combine both kinds of coverage cost more.

When you purchase systems coverage, you can file claims when your plumbing, heating, air conditioning, garbage disposal, and ductwork fail, for example. If you elect appliance coverage, a home warranty may pay to repair your stove, refrigerator, and washer and dryer. It’s important to note that home warranties differ in which appliances they cover under a standard policy. For example, you may need to pay an additional fee to have your washer and dryer covered. Most home warranties offer a variety of plans, which can help you find one that suits your budget. They offer optional coverage for such items as pools and spas, garage door openers, and sump pumps. That can make choosing a policy a little confusing. When you compare home warranty plans, be sure to study which appliances are covered, so you won’t be surprised—and disappointed—down the road when you have to file a claim.

Who Needs a Home Warranty and Who Doesn’t?

When you have a home built for you, it comes with a construction warranty. It will typically cover appliances for one year after your move into your new home. It may cover some systems for up to 10 years. So if you have a construction warranty, you may not need a full home warranty. You might elect to purchase appliance coverage after your one-year construction warranty expires. But you probably don’t need systems coverage right away.

If you purchase an older home that’s equipped with older appliances, both appliance and systems coverage may make sense for you. If you purchase a historic home that features, for example, original plumbing and electric systems, systems coverage can be a major advantage. Antique homeowners share a common phrase: it’s always something. 

Will a Home Warranty Save Me Money?

Housing experts recommend that you budget for home repairs in one of two ways. Some say you can expect to pay between 1% and 8% of your home’s value each year to keep it in top condition. Others recommend you budget about $1 per square foot of your home. Let’s estimate conservatively. If the value of your home is $250,000 and/or 2500 square feet, on average, you’ll pay about $2500 a year to make necessary repairs. That’s considerably more than most home warranties cost. Depending on the plan you select, the average cost of a home warranty is about $300 to $600. So if you choose the right warranty, buying one is likely to save you some money, even when you factor in the service fees you’ll pay when you make a claim.

Home Warranty Limits and Exclusions

One of the reasons home warranty companies sometimes get a bad rap is that people don’t know exactly what they’re signing up for when they purchase one. Home warranties usually come with many restrictions and exclusions. Many cap the amount they will pay out on particular claims. For example, a warranty may only pay $3000 for a covered furnace repair. If your furnace can’t be repaired, that won’t come close to the cost of replacing it. Other policies exclude certain appliances altogether—for example, luxury or commercial-grade stoves and refrigerators. If your kitchen is tricked out with a Viking range or Subzero fridge, it may not be covered under your warranty. Most home warranties require you to perform routine maintenance on your systems and appliances and won’t cover repairs that they deem “pre-existing conditions.” Roof repairs are also commonly excluded. That’s why it’s absolutely critical that you read your warranty’s fine print. That’s the only way to figure out whether buying a home warranty is an economically sound choice for you. Remember that the time to buy a home warranty is before you need it. Some warranties also impose a 30-day waiting period before they will pay a claim. So effectively, you’re paying for an extra month with no coverage.

What’s the Verdict on Home Warranties?

Every home and every homeowner is different. If you’re not sure how well the systems and appliances in your home have been maintained or if you suspect that many of them are reaching the end of their useful life, a home warranty can offer some very helpful protection. If your home is brand-spanking-new, you may pay for coverage that you won’t use. But knowing precisely what your warranty will and will not cover is the first step in getting the most value out of your purchase.

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