What Is a Home Warranty & How it Can Save You Lots of Money

What Is a Home Warranty & How it Can Save You Lots of Money

What Is a Home Warranty & How it Can Save You Lots of Money was written by Sanjana Vig and originally appeared on Savoteur. It has been republished with permission.

If you've purchased a home or are on the market for one, someone will mention the need for a home warranty policy. The big questions though are what they cover and whether or actually not you need one. We're here to help you decide the answers to these questions.

Home Warranty

What Is a Home Warranty?

A home warranty is essentially an insurance policy that covers your home. This policy is not to be confused with homeowners insurance, which covers damages or losses to your entire home or possessions (think fire, flood, and the like).

Home warranties cover items in your home that are breaking or malfunctioning. The home warranty company you contract with will send someone to help you fix it, pay for any damage, or replace the item altogether.

Items covered under a home warranty include electrical systems, HVAC units, furnaces, and major appliances like your fridge, dishwasher, washer, and dryer.

Depending on the company, there may be additional coverage options that you can opt into. Opting in is called an “extended warranty” and can increase the cost of your premiums.

How Much Does a Home Warranty Cost?

Home warranties can cost hundreds of dollars annually and often must be paid in full. Some companies offer payment plans to spread out the expense for a new homeowner.

Factors affecting the cost of a home warranty include:

  • The company itself
  • Location and type of home (e.g., single-family, condominium, townhome)
  • Amount of coverage chosen (basic vs. extended)
  • Age of the property (newer homes tend to cost more)
  • Need for coverage of additional dwellings on the property (this is called a “comprehensive home warranty” and is often not included in basic plans)

Factors like the size of the home have no bearing on the cost of home warranty plans.

In addition to premiums, there is a fee for a the home warranty inspections that customers must pay after filing a claim. This fee ranges from sixty to a hundred dollars per person that comes to the home to perform an inspection.

The fee must be paid even if the inspector deems the problem unfixable by the home warranty company or if they state that the plan doesn't cover the damage.

The Best Home Warranty Options

There are several home warranty companies on the market. They all have different reputations and provide various advantages. Some of the most popular ones in the US include:

  • Best Overall: American Home Shield
  • Best Basic Plan: Choice Home Warranty
  • Best Value: Select Home Warranty
  • Most Responsive: Liberty Home Guard
  • Best for Customization: AFC Home Club
  • Best Appliance Coverage: First American Home Warranty
  • Best Additional Perks: Cinch Home Services

Different companies may be prevalent in other cities/towns, which can affect your options. Speak with your real estate agent to understand what's preferred in your area and get feedback on what is popular amongst homeowners.

Things to Consider When Reviewing Home Warranty Company Options

If you're interested in purchasing a home warranty be sure to ask the following questions:

  • What does the home warranty cover? Look into which specific problems the policy includes.
  • How much is the cost of premiums?
  • What is not covered, or what are the exceptions listed in the policy?
  • What are the service call fees? And what is the average lead time to getting a home visit?
  • Which local contractors do they commonly work with?

Pros of Having a Home Warranty Plan

There are a few advantages to purchasing a home warranty.

A plan purchased when you first buy a new home can be beneficial because it can provide a buffer to fixing common problems that may arise, especially in that first year when you're adjusting to new appliances and a new environment.

If you're not handy with using tools and performing repairs, a home warranty policy can also provide an avenue for quickly getting things done. In addition, this kind of coverage can help reduce the final cost of repairs.

It is typical for a home seller to offer a one-year warranty to a homebuyer. It may provide some financial stress relief and security to avoid high-cost issues that may arise in the future.

Cons to Home Warranty Protection

While having a buffer for your new home purchase sounds like a great idea, there are several downfalls to a home warranty.

First, most warranties are strict in what they cover. If a warranty doesn't cover the problem that needs fixing or doesn't cover the total cost, then you are also paying out of pocket for someone else to resolve the issue on top of the premium. Plus, you still pay inspection fees when you have to call a pro for a home visit to see if the issue is covered by the home warranty.

This gray area can cause a lot of frustration and heartache for new homeowners who rely on the financial buffer.

If the warranty covers what you need, the company will hire the local contractor you need. That sounds great in theory, but you, as the customer, have no say on who the contractor is. As we all know, all contractors are not created equally. In this case, you get stuck with what the warranty company gives you.

You could also not have issues for several years after moving into your home. In that case, you are paying a premium with no benefit. This money could be better placed in an emergency fund account with high interest or invested in the stock market.

This opportunity cost is something to calculate and consider before purchasing a home warranty.

Home Warranties, in Summary

A home warranty may not be the best choice for everyone. It's a personal decision that should hinge on the kind of home you are purchasing and your financial situation.

If you are unsure if it's the right choice for you, you can ask the seller of a house you are interested in buying to pay for a one-year warranty. In this scenario, you will be able to choose the home warranty company. This way, it's not your financial burden, you get the advantage of a potential buffer if anything goes wrong with the house, and you can cancel once the year is up if you no longer want it.

Final Thoughts

There is no right or wrong answer to purchasing a home warranty. As a new homeowner, staying on a budget after such a big purchase and spending your money wisely is imperative. As with any other major decision, it is essential to be armed with the best information to make the most suitable decision for you and your family.

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