New homeowners are often urged to purchase a home warranty to insulate themselves against unexpected home repairs and protect their new asset.  Home warranties are marketed to people with limited savings and those who are not handy. What is a home warranty?  Do you really need it?  Are home warranties worth the money?

Home Warranty -vs- Homeowners Insurance; What’s the difference?

People often confuse a home warranty with homeowners insurance.  A home warranty is an optional policy that you can purchase for the repair or replacement of common household systems and major appliances.  Household systems include plumbing, electrical, heating and air conditioning.  Major appliances would include your refrigerator, washing machine and dryer.  Home warranties cover damage caused by normal wear and tear.  Conversely, homeowners insurance is usually required by your mortgage lender and covers your home’s structure and contents.  Homeowners insurance kicks in when the damage is due to fire, theft or a natural disaster.

How Does a Home Warranty Work?

Most home warranty companies will offer a basic policy which covers common home items.  For an additional cost, more items can be covered with enhanced plans or “add ons”.  When a covered appliance or system needs repair,

1. The homeowner will call the home warranty company
2. The home warranty company will send out a contractor
3. The homeowner pays the contractor the trade call fee
4. The contractor diagnoses the problem and reports it to the home warranty company
5. The home warranty company will pay any remaining balance to the contractor.

This process may appear straight forward but in practice, it can be long and tedious especially if the contractor and warranty company disagree.

How Much Does a Home Warranty Cost?

Prices for home warranties are not standardized.  The cost will vary from one company to the next.  Premiums are based on the size of a home, the type of a home (Ex. single family house, townhouse, condo) and the home location.  Older home systems and appliances cost more since there is a greater chance of them needing repair or replacement. 

In general, the cost of a standard policy will range from $25-50 per month.  An enhanced policy can cost $75-125 per month.  Like other types of insurance, home warranty premiums must be paid even if you never file a claim.  An additional trade call fee of $50-$75 is paid to the contractor who makes the repair.

What Doesn’t a Home Warranty Cover?

On its face, a home warranty seems to be a great deal but there are many items that are not covered.

• Pre-existing Conditions – if a home inspection revealed problems which were not corrected prior to closing, those items would not be covered. For instance, if a major plumbing problem was identified during the home inspection, but not repaired, the home warranty company would deny those plumbing claims.
• Poor Maintenance – Home warranty companies across the board require that home systems and appliances be properly maintained. If the company suspects that the home maintenance was poor, it can refuse to pay for repairs.  This term is very vague and is frequently the subject of disagreement for policyholders.
• Roofs, walls, doors, windows and floors – As previously mentioned, home warranties cover home systems and appliances. Walls, doors, floors, etc. don’t qualify as home systems and are rarely covered.
• Exclusions, Caps and Annual Limits – Home warranties have numerous exclusions that you should understand. For instance, a large home may have 2 air conditioning units.  Only one unit would be covered by the policy.  Also, these policies have caps on the amount of a specific repair as well as annual limits.  Policyholders frequently have high out-of-pocket expenses for uncovered items.

Additional Information to Consider

Having a home warranty may not always be wise.  For instance, if your home is a new build with new appliances, the home will already be covered by the manufacturer’s warranty.

Homeowners have limited control over which contractor makes repairs.  Home warranty companies hire independent contractors and decide which one to dispatch to your home.  If you hire a contractor on your own, the home warranty company will not reimburse you later.

The home warranty company decides what course of action to take when making repairs.  They will obviously choose the cheapest option to fix the problem if the better option costs more money.  My close relatives experienced this practice firsthand.  They had an air conditioning unit that would randomly shut off.  The HVAC contractor checked the unit and said it was an electrical problem.  Days later, the electrician restarted the air conditioner but determined that the unit needed to be rewired to operate properly.  The home warranty company refused to approve the more expensive repair until the customer had made 3 claims for the same issue.  The problem took several weeks to be resolved.  Meanwhile, the residents endured numerous days of 100+ degree temperatures with no air conditioning.

Home warranties provide for the replacement of appliances when a repair isn’t a viable choice.  The new appliance will be the same as or similar to the broken appliance.  If you want to upgrade to a higher tiered appliance, this would not be covered.

Is it Right For You?

Like most things, the decision to purchase a home warranty is very personal.  A new homeowner may find comfort and peace of mind with a home warranty.  They may prefer a monthly budgeted cost rather than a surprise repair bill when they are trying to adapt to homeownership.  Others may feel that the extra monthly expense is unnecessary. 

Are home warranties worth the money?  You can best answer this question if you compare the cost of repairing or replacing existing items to the cost of a home warranty.  You should also consider the age and condition of your home.  Finally, read the fine print before you sign up for a home warranty.