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.
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:
In most cases, homeowners must pay a deductible, typically $75 to $100, for every repair that occurs under the warranty.
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.
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.
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. With interest rates so low right now, especially when you deal with Loanatik, you should be able to afford a really good warranty, so don’t settle for a crappy one that’s barely worth the paper it is written on.