What Are Home Warranties?
Home warranties are not the same as home insurance and shouldn’t be purchased as one. Home insurance covers major perils (events) like fires, hail, property crimes and certain types of water damage. A home warranty doesn’t cover these items; rather, it covers specific components of your property.
Home warranties are contracts between you and the warranty company provide discounted replacement/repairs on the property’s major components. Home warranties can also cover major appliances such as washers and dryers, refrigerators and swimming pools.
Warranty companies have agreements with approved contractors so they can get an approved technician out to examine the problem quickly. When covered items break down, the homeowner contacts the warranty company to send one of their contractors to examine the problem. If your technician determines that the problem is covered, he completes the work. You are usually responsible for a small service fee, plus the money you’ve have already spent on the home warranty.
How Do Home Warranties Work?
The average warranty costs between $350 to $500 annually and requires an affordable flat fee for an approved repair. This expense is small compared to the potential cost of some home repairs. In the event a covered appliance breaks down, you’ll just need to call or email your warranty company to file a claim and they’ll send a technician to repair or replace your equipment.Home warranties are cheap insurance in case of breakdown. Click To Tweet
Home warranties have become a popular component of real estate transactions because new owners want peace of mind that large repairs will be covered in their new investment and the sellers want to assure potential buyers that their property won’t hit them with any nasty surprises.
Home Warranties versus Home Insurance: What’s The Difference?
The average homeowner thinks they should only have a home insurance policy to cover their property. I’ll bet you’ve never stopped to take a look at your home owner’s policy. Most policies only cover issues related to damage to your property. People who live in the Midwest experience harsh winters can cause pipes to burst inside their walls. An insurance company would send out a repairman to fix the problem without thinking about what caused the damage. A broken pipe can cause water damage to your walls, lead to mold developing on carpets and other additional damages. A home warranty policy can cover the cost of all repairs needed on your property.
What Isn’t Covered By Home Warranties?
A basic home warranty policy covers a wide range of items such as built-in appliances, plumbing, electrical and exhaust systems. These plans usually don’t cover garage door openers, automatic garage door systems or air conditioners, but you can purchase additional coverage to pay for damages to these systems. Most home warranties companies offer multiple policies and levels of coverage. Most homeowners add the additional coverage to protect items not usually covered by the standard warranty such as central vacuum systems, swimming pools, wells and spas.
What Do Home Warranties Cost?
Home warranties usually cost a few hundred dollars per year, paid up front(or in installments, if the warranty company offers an installment plan). The cost of the plans vary depending on the property type, e.g. single family, condo, townhouse, duplex, etc. and whether the homeowner purchases a basic or an extended coverage plan. The cost also varies depending on the age of the property, unless the property is brand new, which increases the cost of the coverage. Usually the square footage of the property doesn’t make a difference in pricing if it is less than 5,000 square feet. Separate structures such as guest houses, sheds and other buildings are not covered by the basic policy, but can be covered for an additional fee. However, garages are usually covered under the basic policy.
Home warranties also charge a service call fee (also called a trade call fee) to the cost of the annual premium. This fee is usually $75 to $125 every time the warranty holder requests a service call. If the problem requires more than one type of contractor to make the repair (e.g. plumber and an electrician), the property owner may have to pay the service fee for each contractor.
I want you to understand that having a home warranty doesn’t mean that you’ll never spend a penny on home repairs. Some repairs may not be covered by the home warranty. Also, these policies don’t cover components that haven’t been properly maintained. Furthermore, if they deny your claim, you may still be responsible for the service fee and repair costs.
How Do I Benefit From A Home Warranty?
Like any warranty, a home warranty policy is supposed to protect the homeowner against unforeseen, expensive home repairs. If the homeowner doesn’t have an emergency fund or if you want to protect your stash, the warrant can act as a buffer. People like Dave Ramsey say that they are a waste of money, but he can also afford to keep a stockpile of money saved up unlike the average homeowner. A home warranty also may not make sense for someone who is handy or doesn’t have a problem tracking down a reliable contractor should something go wrong. Warranties especially make sense for homeowners with expensive taste in appliances such as high-end kitchen appliances.Dave Ramsey doesn't like home warranties, but he's not paying for your repairs. Click To Tweet
Knowing what is covered by your policy, you can rest easy know that most panic-inducing repairs will be taken care in the event of a breakdown. These are just a few of the reasons homeowner love home warranty policies:
Benefits of a Home Warranty
- Peace of mind: The biggest benefit is the ability to not worry about large home repairs. Leaky toilets and broken air conditioners won’t give your chest pains because a fix is just a phone call away. Costly home repairs that would ordinarily cause financial hardships are no longer an issue.
- Repairs are easy to get done: Since you have a home warranty, you only need to remember one phone number (the claims number for your warranty provider) and you won’t have to worry with interviewing contractors. The warranty company is responsible for handling the contractor selection. In most cases, you can file a claim 24/7/365 and will just have to wait for the repair person to arrive.
- The warranty can more than pay for itself: Most home warranties cost between $350 to $500, but experts recommend that homeowners plan to spend 1% to 4% on home repairs annually. If you own a $200,000 home, that’s a minimum of $2,000 annually, far more than the cost of a good home warranty.
- Major home repairs won’t put you into debt: If you have a serious repair such as a plumbing or electrical issue, it could potentially cost thousands of dollars to fix. If you don’t have an emergency fund, this could be devastating and would require a payment plan. This new expense just adds to the debt you already have and could possibly strain your credit rating. A home warranty can take away some of the pressure in the case of a large repair.
- Your warranty could be free: if you’re buying a home that came with a warranty, you would be covered for free during the term of the warranty. It has become increasingly popular for sellers to include a home warranty in the sale of a home to attract buyers.
- Service calls are a flat, affordable rate: I’ve seen some repair companies charge a $150 just for an estimate. With a warranty, you usually have a set rate for service calls.
- You get to choose your level of protection: Most warranties offer a basic and premium plan. The basic plan covers major systems such as HVAC, electrical, plumbing and appliances. There is also optional coverage for items like septic systems, pool and spas. Customizing your coverage allows you to save on some items and increase coverage on big ticket items.
- Home warranties can help you sell your home: When you get ready to sell your home, a warranty can be used to sweeten the deal. You can highlight this in your advertising because it would give potential buyers peace of mind. You may also see a bump in your sales price.
What’s The Drawback of Having a Home Warranty?
If all home warranties were perfect, everyone would buy one. One of the biggest drawbacks is that they don’t cover items that weren’t properly maintained. This can be a huge gray area and is at the source of many disagreements between homeowners and the warranty companies. There have been some cases of unscrupulous warranty companies and repair technicians denying claims due to supposed lack of maintenance. Unless you have records of preventive maintenance, it really is your word against theirs.
Another common problem is when a homeowner purchases an older home that may have come with a 10-year old furnace that wasn’t properly maintained. In this case, the new homeowner really can’t win if the warranty company wants to deny the claim. In addition, warranty companies have numerous exclusions, as well as annul dollar limits for repairs.
Warranties aren’t expensive when you factor the cost of repairing/replacing a major system and this is their bestselling feature. However, there may be several years when the homeowner doesn’t have any break downs. They feel they’ve wasted their money on the policy. That money could’ve been put into an emergency fund for making the same repairs and replacements. If the homeowner tries to use the warranty and is denied, they’ll feel like the money was wasted.
If you’re not comfortable with contractors, the warranty company does this for you. However, you lose the right to pick your own contractor if you want the warranty to pay for repairs. The homeowner may has no say in the brand of a replacement component. Although, the warranty contract should provide for a similar- or equivalent-quality replacements.
While there are many benefits of a home warranty, you’ll still need to maintain the property. These are some of the drawbacks to purchasing home warranty:
Drawbacks of a Home Warranty
- You might not need the warranty: If you have a newer home, you won’t find it valuable. Although, a few hundred dollars if cheap insurance in the event of a large repair.
- You can’t pick your service provider: The repair company is chosen by the warranty company. You’re simply be sent the company that handles that type of repair for the provider. The up side of this is that the contractor has been vetted by the home warranty company.
- Warranties won’t fix what’s already broken: Poorly maintained/broken equipment isn’t covered under home warranties. If you think you’re going to pull a fast one, you’re going to be angry and out of luck.
- Repairs are more likely than a full replacement: Warranties always try to repair items before they authorize complete replacements. Keep this in mind for really expensive or high end systems such as smart homes, expensive appliances, etc.
- Important systems may require additional coverage: Your HVAC, septic system represents a significant repair expenses if it breaks down. These items may not be included in the basic policy; you’ll have to pay extra if you want these items covered.
- You’re required to carefully maintain all systems and appliances: Repairs are covered by your home warranty, but you’re on your own with maintenance. If you don’t keep up with proper maintenance, your claims may be denied. The warranty company can’t be liable for equipment that’s abused or not taken care of. You’ll need to schedule regular service for all systems. You should also keep careful documentation of when/how they were serviced.
Who Are The Top 4 Home Warranty Companies?
- American Home Shield – Most flexible coverage and best reputation.
- The Home Service Club – Most comprehensive coverage.
- America’s 1st Choice Home Club – Best repair guarantee.
- First American Home Warranty – Lowest premiums.
Criticisms of Home Warranties Programs
Warranties offer peace of mind, some have unrealistic expectations of what’s covered, says Angie Hicks, founder of Angie’s List.Unrealistic expectations give home warranties a bad name. Click To Tweet
Home warranties only promise to keep home elements functioning, not to provide the homeowner with new appliances. Hicks says consumers get frustrated because they can’t decide to repair/ replace items or who does the work.
“Home warranty policies have topped the list of the most-complained-about categories for the last five years on Angie’s List,” Hicks says. “The complaints generally center around warranty policies on existing homes.
Most homeowners complain about the lack of control over what subcontractors are sent to do the work. Criticisms are often unfair to warranty companies, homeowners need to read their policies and know what’s covered.
The average warranty costs $400 and covers $20,000 worth of items. Consumers should understand that they’re paying for peace of mind. Don’t expect a warranty that costs $400 to pay for a new $6,000 A/C compressor if the old one can be repaired.
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