When to Pay for a Home Warranty (and When Not To)
Buying a house is an expensive operation. Not only does the average price of an existing home exceed $375,000, but the average price of a new home is approaching $440,000. And that’s just the price of the house—there’s also closing costs, insurance costs, loan fees, attorney fees, inspections, relocation, and potential costs for new furniture and other items . And as soon as you get there, the water heaters leak, the appliances break down, and the air conditioners need to be repaired. That’s why the idea of a home warranty might seem like a pretty good one.
Pay a relatively small monthly fee, and whenever something expensive breaks down, your guarantee will send someone to fix or even replace it: sounds amazing. And a home warranty might be a good idea, but you have to know what you’re getting into.
What is a home warranty?
Before we delve into the need for home safeguards, let’s delve into what they are and what they are not. The home warranty is not insurance . This is the plan you pay for. Homeowners insurance compensates you for damage to your home and insured property resulting from natural disasters or theft—it protects you from home damage and resulting losses. A home warranty is a contract that offers certain services in exchange for a fee and is designed to repair or replace home infrastructure such as HVAC systems or a dishwasher. Home warranties are best thought of as an added layer of protection to your insurance because the items they cover are usually excluded from most homeowners insurance policies.
A home warranty is a contract, and usually quite complex. As such, you need to read the fine print carefully because many warranty plans themselves have huge exclusions and often limit the amount of money that can be spent on repairs or replacements.
How much is a home warranty?
Assuming you’ve read the fine print and understood the limitations of the home warranty you’re considering, the next thing to figure out is if it’s worth the cost. Home warranties are usually billed monthly and can range from just over $250 a year to a whopping $1,425 a year depending on many factors, including the size and age of your home, what is covered by insurance, and where you live. The average annual cost is about $600.
Given that the cost of replacing a stove, for example, is between $2,000 and $10,000 , a home warranty can be a bargain. If you need to replace that stove within a year or so of moving into a new home, you’re paying a few hundred dollars at best instead of a few thousand. But this assumes that your warranty guarantees full cost coverage; many don’t, as many popular warranties offer a limited cap of $1,000 to $2,000 for something like a new oven, which means you’ll still be paying thousands of dollars out of pocket.
On the other hand, if your dishwasher is broken and needs repair, your average cost will be between $160 and $300 . If you’ve paid for a five-year home warranty and spent $3,000, free dishwasher repairs aren’t such a good deal. If your warranty specifies that the dishwasher cannot be repaired and must be replaced, you’re out a little better, but it’s still a pretty expensive dishwasher. And it might not be as good an appliance as your old one – many home warranties don’t guarantee a “similar like” replacement, meaning that if the appliance fails, there’s no guarantee you’ll get as good or even the same. . size , as a replacement. And take another look at that fine print: many home warranties limit the amount they’ll actually pay for a repair, or the amount they’ll pay for a device replacement, and the refund can be much less than what you’re actually paying.
And on top of all that, most home warranties also have a maintenance fee that you’ll have to pay even if you’ve been paying for coverage for months or years. These fees typically range from $50 to $75, which is cheaper than the full service fee that an independent contractor like a plumber or electrician charges you.
What to look for before buying a house with a guarantee
There are three more things to consider:
- Service. Many home warranty companies contractually require you to maintain things like the heating, ventilation, and air conditioning systems in your home on a regular basis, and may require proof of that service. If you can’t make it, they may refuse to pay for the repair if they think it was your negligence.
- existing warranties. If your devices and systems are relatively new, check to see if they are covered by a valid manufacturer’s warranty. If so, the home warranty from above is probably not needed.
- Another use of money. If you’re thinking about paying a monthly fee (say, $100) for a home warranty to avoid spending on expensive repairs, consider this: if you put that money into a high-yield savings account , paying 4.85% per annum. , in five years you will have about $7,000 in this account, which will cover most of the cost of repairs or even something like replacing the stove. And if you never need to use it, that money just stays and grows.
Is it worth buying a home warranty?
The answer depends on your situation:
- If you’re buying an older home, it may be a good idea to pay for the first year’s home warranty. If the previous owner was putting off replacing something like a stove because she knew she was selling the place, the chances of her kicking you out when you’re cash-poor due to buying a house aren’t zero.
- If you ‘re selling a home, paying upfront for a home warranty can be attractive to buyers because it gives them a sense of security in case something goes wrong.
- If you like the idea of having a single point of contact for all your home renovation needs, a home warranty might make sense. It simplifies everything because you don’t have to look for individual contractors, and makes paying for major repairs a little less intimidating because you know you’re getting some help in that regard.
- If you don’t have much money overall and can’t build up a cash reserve in a short amount of time, it might be better to pay a relatively small monthly fee for a while than to live in fear every time the lights flicker because you won. . cannot afford a major home renovation. Otherwise, putting that money in a savings account or other investment may be the best use for it.