Are Home Warranties a Good Deal?

Buying a home, even a newly-built one, is fraught with risks. It’s quite understandable that prospective buyers would want to limit those risks as much as possible, which explains why professional home inspections, title insurance and termite inspections are standard practice. Home warranty programs would seem to be valuable risk reducers, but it can be hard to judge whether a particular warranty is worth the money. In this article, we’ll dive deep into home warranties and lay out some guidelines to judge which ones are worthwhile.

What Are Home Warranties?

Home warranties are service contracts, not insurance policies. They cover repair or replacement of specified home components, such as appliances, HVAC equipment, plumbing and so forth, for a set period (usually a year) following the purchase of a home. By contrast, homeowner’s insurance covers your home and its contents for the costs of fires, storms, thefts and other bad things.

Home warranties are often included for little or no money as part of a home purchase. There are two types of home warranties:

1. For newly built homes: The price of the home includes the warranty, which is provided by the builder. These warranties typically have varying terms:
   1. Appliances – 6 months
   2. Stucco, paint, drywall – 1 year
   3. Electrical, plumbing, HVAC – 2 years
   4. Structural defects – commonly 10 years, under the 1-2-10 builder warranty that is standard on new construction: one year on workmanship, two on systems, ten on major structural elements. How long you can actually bring a claim is set by your state’s statute of repose, which runs roughly six to fifteen years depending on where you buy.
2. For existing homes: These warranties are usually sold by third parties and paid for by the seller. The cost is usually a few hundred dollars. Homebuyers should check to see whether the sales contract specifies a home warranty and, if so, who pays for it and what it covers. These warranties usually are good for one year and include appliances, HVAC, plumbing, etc. They may or may not also cover structural defects.

In most cases, homeowners must pay a deductible, typically $75 to $100, for every repair that occurs under the warranty.

Buyer-Bought Warranties

Some warranties are sold directly to homebuyers, usually following the purchase of a short sale or foreclosure. The bank will typically not pay for these direct warranties. If you buy one, expect to pay $350 to $650 a year for coverage. You should explicitly detail which items are covered, including sump pumps, hot tubs ceiling fans, septic systems, pools, garage door openers, etc., in addition to the usual appliances and mechanical systems. You might be able to buy two warranties — one for the basics, and a second, enhanced warranty for the major appliances.

Here’s a smart tip: If you buy new appliances or furniture for your home, use a credit card that includes its own warranty protection. Many of the better cards offer this feature, which extends the manufacturer’s or store’s warranty by a year or so.

Figure the Odds

Whoever pays for the warranty, it is important for the buyer to evaluate just how valuable the warranty is likely to be. If you are buying a new home, presumably all the appliances are brand new and probably are covered by their own manufacturer’s warranties. If your structural engineer gives the home a clean inspection report, then it is less likely that you’ll suffer structural defects or faulty systems. In these circumstances, the home warranty is nice to have, but not all that valuable. In other words, don’t be overly impressed if the homebuilder offers to throw in a free warranty – it is something every builder should do anyway.

If you are buying an existing home and not replacing the appliances, find out the age of each covered item and compare that to its expected lifespan. You can look up this information at the website of the National Association of Certified Home Inspectors. Obviously, the older the item, the more valuable the coverage. Also, factor in the deductible you’ll have to pay for each claim under the warranty. Make sure that problematic appliances and other components are not excluded from the warranty. If they are, you may want to lower your bid accordingly. Many homebuyers like to rip out the existing kitchen and start fresh, so the home warranty is most valuable to the extent it covers structural defects and major systems for which no repairs are planned.

Reasons to Get a Home Warranty

1. Buying an existing home means buying property that has experienced wear and tear. Even though you’ve factored that into your bid, you might still want coverage against the cost of breakdowns and problems. You are going to kick yourself if you did not get a warranty on that old furnace that caught fire a week after you closed on the house.
2. Your emotional well-being is worth at least a few hundred dollars, isn’t it? Even if you never have to use the warranty, it is nice to know it is there. With all the nighttime tossing and turning you’ll be doing as you adjust to your new home, a home warranty can seem like quite a bargain for the peace of mind it brings.
3. Foreclosed and short-sale properties are often sold “as is,” but the contract and applicable law determine the seller’s repair commitments and any remaining buyer remedies. Presumably, you are getting a good deal, so it should be no problem to apply some of the money you are saving toward the purchase of a comprehensive home warranty.

Problems with Home Warranties

1. Some warranties are written to be easily voided. For example, the warranties may not apply to an appliance that you did not maintain properly, was incorrectly installed, or which experienced too much wear and tear after the closing. For example, if the old oven breaks down because you set up a cookie-baking business in your kitchen, the warranty company may refuse to pay for a replacement.
2. The warranty may have restrictions that reduce its value, such as:
   1. The warranty company may require a faulty component to be repaired rather than replaced
   2. The warranty may specify a particular service contractor who, at best, isn’t your first choice and at worst is nobody’s choice except the warranty company’s
   3. The warranty may pay only a small portion of the covered cost, especially after you figure in the deductible. For example, it could be that the refrigerator is covered, but that the ice maker is not.
   4. The warranty company may fight you, claiming that you broke the component or didn’t maintain it properly
   5. Home warranties seldom specify that they will replace a faulty appliance with a new one. Instead, it may require one or more repair visits, each one with its own deductible. Find out in advance whether the warranty guarantees that a replacement component will be brand new, or some recycled appliance that might have been someone else’s headache

Protect Yourself

If you do get a warranty, especially one that you pay for, you should at the very least read it carefully and understand its provisions. Whenever possible, it is a good idea to shop around, as there are many warranty companies out there, with varying quality contracts. You might hire a realtor (not the seller’s!) to give you advice and help you choose the best warranty available. Compare the premium, service fees, coverage limits, and exclusions with your budget before choosing a warranty, and don’t settle for one that provides little value.