Buying a home is a major investment - in fact, for most homebuyers it’s likely the most sizable investment of their lifetime. Not surprisingly, putting so much money into one asset can be nerve-wracking - what if something goes wrong?
Although they’re not required to buy a home, home warranties are a line item that frequently gets added to closing costs - either as something the buyer wants in order to protect themselves, or as something the seller offers in order to sweeten the deal and make buying the home more appealing (especially if it’s an older home).
Are home warranties worth it? Here’s what you should consider.
What is a home warranty?
Buying a home is an expensive endeavor that often sucks up much of the liquid cash a homeowner has. In other words, buying a home and then having to pay $5,000 to repair a collapsing roof four months later might create significant financial stress.
A home warranty is a contract that provides discounted repairs and replacement services, covering most major components of the home. These policies often include major appliances as well (such as the refrigerator).
"Sellers will sometimes include this with older homes that are more likely to be in need of repairs soon," explains Muoki Musau, a Virginia-based buyer agent. "Home warranties are not as important for new homes, or if people have saved up enough money to cover the cost of first-year maintenance and possible repairs."
What do home warranties cover?
Every home warranty policy is different, and more extensive policies will typically be more expensive.
Generally speaking, home warranties typically cover things like:
- HVAC, plumbing, and electrical
- Major appliances - dishwasher, refrigerator, garage door opener, clothes washer, etc
- The roof
- Smoke detectors
- Optional add-ons (such as pools or well pumps)
And most of the time, you can expect that a home warranty will not cover:
- Pre-existing damage
- Damage due to fault (incorrectly installing something, for example)
- Cosmetic damage (scratches, chipped paint, etc)
- Damage due to catastrophic events rather than wear and tear/age (example: tornado damage)
You might be wondering about the benefits of a home warranty vs. home insurance.
Home insurance tends to cover more catastrophic events, like a flooding basement, hurricane damage, theft, or fire damage. In other words, things that can happen to your home but might never happen. A home warranty is more likely to cover home systems, like the AC unit or plumbing problems. In other words, things that will definitely break down and need replacing or repairs at some point in time.
Home insurance typically doesn’t cover the same components of a home warranty, and home insurance policies tend to have a deductible the homeowner needs to hit first (so you might need to pay the first $1,000 in repairs yourself).
Should I get a home warranty?
A good home warranty can be worth it, especially if you live in an older home that stands a reasonable chance of needing a major repair or replacement within the first few years of living there. Many homeowners opt to have a home warranty just for the first year or two of homeownership to mitigate the risk of an unanticipated financial burden.
On the other hand, a home warranty may not be worth it if you’re purchasing a newly built home - because your house is unlikely to need major repairs in its first year or two (although it’s always possible). In many cases, your home builder might even issue a warranty for the home for the first year anyway, rendering the need for an additional home warranty moot.
How much is a home warranty?
According to Rocket Mortgage, the average annual cost of a home warranty is between $300 and $600 (depending on how much your plan covers). This equates to a typical monthly payment between $25 and $50.
It’s worth noting that a home warranty doesn’t cover every part of the repair. You’ll likely have to pay a service charge for the technician to come to your home. A technician will usually cost anywhere from $75-$125. This may also be known as a “trade service fee.”
How does a home warranty work?
Let’s say your air conditioning unit stops working. If you have a home warranty, this is how it works:
- You make a call to the home warranty company and file a claim.
- The home warranty company will contact a service provider.
- The service provider will come to your home and fix your AC (or set up a plan to replace it if necessary)
- You’ll be billed the service fee - approx. $100.
So what would happen if you didn’t have a home warranty in place? In this case, you’d call an HVAC repair company directly. According to Home Guide, you could expect to pay $150-$650 for an AC repair (depending on the cost of labor, cost of parts, and complexity of the issue).
If your AC was totally beyond repair, it could cost you up to $5,000-$10,000 to completely replace it. This may not be money you have on hand if you've just paid closing costs and a down payment on your home.
How to choose your home warranty plan
If you opt for a home warranty, don’t just choose the cheapest plan available - that could blow up in your face if you save $10 a month but the company fights you tooth and nail when it comes to actually paying for repairs, or if you have a $10,000 issue but your coverage cap is $2,000.
It’s also a good idea to read online reviews to get a sense of whether companies send technicians quickly, or conversely, appointments take weeks to schedule (not ideal if your fridge is broken!).
"Shop around," advises Musau, "And see what current clients are saying about their services."
According to Better Business Bureau representative Katherine Hutt, “Most of the complaints that the BBB receives about home warranties stem from the fact that consumers don't understand the coverage their plans provide.”
It’s important to read the terms and conditions of your warranty carefully so that the rug isn’t pulled out from under you once your home has a real issue.
To help with this some plans are customizable, allowing you to only pay for the systems or appliances you’re really worried about.
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