The Case For Home Warranties

What is a home warranty?
Why should I purchase one?
What is the difference between a home warranty and home insurance?

Home warranties and home insurance both cover unexpected circumstances. However, your homeowner policy includes exclusions for coverage of items that sustain a loss due to regular wear and tear or mechanical breakdown. For example, if your home water heater suddenly stops functioning, you will likely find that your home insurance policy will not provide any coverage for its repair or replacement.  A home warranty is designed to cover numerous things that are not normally covered by home insurance. You might think of it as a backup insurance policy.

A home warranty is a product that covers different aspects of your home and is designed to help you out financially if you need to make repairs or replacement of items or systems in your home that are generally very costly to repair or replace. If you have a home warranty policy on your home, then you have a service contract to help you in the event a covered item in your home requires unexpected repair or replacement.

Most home warranty policies cover items such as HVAC systems, plumbing, and large appliances. If you opt to purchase a home warranty policy for your home, you can choose a policy that may provide very basic warranty coverage to very extensive coverage depending on your needs, budget and how much risk you think you might have. You might assess this risk level based on the age of your home and its major systems or appliances, in addition to the general condition of those items.

When you purchase a resale home, a home inspector may help you provide this assessment of the condition of the major systems in your home so you may decide how much policy coverage you need. Your realtor will also likely recommend asking for the Seller of your new home to pay for the first year of your home warranty policy (up to a certain dollar amount) in your home purchase contract. Here it is also referred to as a residential service contract.

Financially, a home warranty policy functions much like a home insurance policy – though it generally is a lot less expensive. To purchase a home warranty policy, you select the home warranty company provider and then the policy coverage plan that fits your needs. You will likely pay a one-time fee for the annual coverage of this policy. This could be anywhere from $395 per year to $1,000 or more. Each time you place a service request to have a warranty-covered item repaired or replaced, you will pay a standard “service visit fee,” which is often about $60 a visit. You might also think of this like your deductible assessed when you file a claim for your home insurance policy (though those deductibles tend to be much higher). If we revisit our broken water heater example, this means that a replacement water heater could cost as little as $495 (home warranty annual plan coverage amount) + $60 (service visit fee to replace the water heater), rather than a whopping $1,200+ to replace on your own.

Many new homeowners choose to have a home warranty policy for their first year in their new home to help them more easily navigate the potential financial burden of unexpected failing systems in a home they just inherited from someone else. However, renewing your home warranty policy year-over-year in your home may be a good idea as your home continues to age. If you keep up on the regular maintenance of your home and all of its systems, this home warranty policy annual cost may come as a loss to you. But, it could also be your financial savior in the event that an untimely demise hits even just one of your home’s major systems. If you own any investment properties, renewing your home warranty policy year-over-year is certainly a financial no-brainer!

When it comes time to select a home warranty provider and coverage plan, check out this guide for the list of companies to begin your research. Though it is certainly not comprehensive, it’s a good place to start!

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