Buying a house is an expensive operation. Not only is the median price of an existing home over $375,000, the median price of a new home is close to $440,000. And that’s just the price of the house—there are also closing costs, insurance costs, loan fees, attorney fees, inspections, moving, and potential costs for new furniture and other items. And once you’re in the place, water heaters leak, appliances conk out, and air conditioners need to be repaired. That’s why the idea of a home warranty can seem pretty good.
Pay a relatively small monthly fee, and whenever some big-ticket item goes on the fritz, your warranty will send someone to fix it or even replace it: It sounds terrific. And a home warranty can be a good idea—but you should know what you’re getting yourself into.
What is a home warranty?
Before we dig into the necessity of home warranties, let’s dig into what they are—and what they are not. A home warranty isn’t insurance. It’s a service plan that you pay for. Homeowners insurance will compensate you for damage to your home and covered possessions due to acts of nature or theft—it protects you against damage to the home and losses suffered as a result. A home warranty is a contract that offers specific services in exchange for a fee, and is designed to repair or replace your home’s infrastructure, like HVAC systems or your dishwasher. Home warranties are best viewed as supplemental protection to your insurance, because the items they cover are typically excluded from most homeowners insurance policies.
A home warranty is a contract—and usually a pretty complex one. As such, you’ll need to read the fine print carefully because many warranty plans have hefty exclusions themselves, and often limit the amount of money that can be spent on a repair or replacement.
How much does a home warranty cost?
Assuming you’ve read the fine print and understand the limits of the home warranty you’re considering, the next thing to figure out is whether the cost is worth it. Home warranties are typically monthly charges, and can range from just over $250 a year to a whopping $1,425 per year depending on many factors, including the size and age of your home, what’s covered, and where you live. The average annual cost is about $600.
Considering the cost of replacing a furnace, for example, is anywhere from $2,000 to $10,000, a home warranty could be a bargain. If you need to replace that furnace within a year or so of moving into a new house, you paid a few hundred bucks—at most—instead of a few thousand. But that assumes your warranty guarantees full coverage of the cost; many don’t, with many popular warranties offering a capped limit of $1,000 to $2,000 for something like a new furnace, which means you’ll still be paying thousands of dollars out of pocket.
On the other hand, if your dishwasher breaks and needs repair, your average cost is between $160 and $300. If you’ve been paying for a home warranty for five years and spent $3,000, getting a free dishwasher repair isn’t such a great bargain. If your warranty determines the dishwasher can’t be fixed and must be replaced, you come out a bit better—but that’s still a pretty expensive dishwasher. And it might not be as good an appliance as your old one—many home warranties won’t guarantee a “like for like” replacement, meaning if an appliance dies, there’s no guarantee you’ll get one as nice, or even the same size, as a replacement. And look at that fine print again—many home warranties limit how much they’ll actually pay for repairs, or how much they’ll pay for a replacement unit, and the reimbursement might end up being much less than you actually pay.
And on top of all that, most home warranties also stipulate service fees that you’ll have to pay even though you’ve been paying for the coverage for months or years. These fees typically range between $50 and $75, which is cheaper than the full service fees an independent contractor like a plumber or electrician will charge you, however.
What to consider before buying a home warranty
There are three other things to consider:
Maintenance. Many home warranty companies contractually require you to perform regular maintenance on things like HVAC systems in your home—and might require proof of that maintenance. If you can’t produce it, they might refuse to pay for a repair if they believe it was due to negligence on your part. Existing warranties. If your appliances and systems are relatively new, check to see if they have an existing manufacturer’s warranty that still covers them. If so, a home warranty on top is probably unnecessary. Other uses for the money. If you’re thinking of paying a monthly fee (let’s say $100) for a home warranty to avoid having to splash out for big-ticket repairs, consider this: If you put that money into a high-yield savings account paying 4.85% APY, in five years, you’ll have close to $7,000 in that account, which would cover most repair costs or even something like a furnace replacement. And if you never need to use it, that money just sits there and grows.Should you buy a home warranty?
The answer depends on your situation:
If you’re buying an older home, paying for a home warranty for the first year might be a good idea. If the previous owner was holding off replacing something like the furnace because they knew they were selling the place, the chances it craps out on you when you’re cash-poor from buying a house aren’t zero. If you’re selling a home, pre-paying for a home warranty can be attractive to buyers because it makes them feel protected in case something goes wrong. If you like the idea of having a single point of contact for all home repair needs, a home warranty can make sense. It simplifies everything because you don’t have to search for individual contractors, and it makes paying for major repairs a little less scary because you know you’re getting at least some assistance in that regard. If you’re cash-poor in general and won’t be able to build up a cash reserve in a short time, paying a relatively small monthly fee for a while might be better than living in fear every time the lights flicker because you won’t be able to afford a major home repair. Otherwise, putting that money into a savings account or other investment might be a better use of it.
