For today’s guest post on buying a home warranty, please welcome Dividend Power.
The last two houses that we bought were older ones. The first house we bought was built in the 1980s and the second one in the 1990s. Both were good houses and well built. Older houses are also in more mature neighborhoods making them more attractive. However, there are often concerns about aging appliances, roofs, plumbing, electrical, and other systems when buying an older house. In addition, the cost of repairs or replacement can run into hundreds or thousands of dollars. As a buyer, you can often get the seller to include a home warranty for the first year as part of the deal. However, what about the second year, or suppose you have been in a house for a decade? Is it worth buying a home warranty in that case?
What is a Home Warranty?
A home warranty is typically bought at the time of a home purchase. It provides a warranty on major appliances along with plumbing, heating, and electrical systems, and roofing. Major appliances include furnace, air conditioner, water heater, dishwasher, oven, stove, garbage disposal, and garage door opener. Other appliances can be included on an optional basis. A home warranty is valuable if the home purchased is old and has old appliances or systems. In general, a home warranty will cover the service and repair of major appliances and systems. A home warranty may also cover replacements of major appliances.
It is essential to read the fine print when it comes to home warranties. The costs of the home warranties, their deductibles, and items covered are variable depending on the company that offers them. In general, you need to understand the following for home warranties:
- What is covered and what is not covered,
- Dollar limits on coverage,
- Deductibles, and
- Improper maintenance clause.
Some home warranty companies have dollar limits on coverage. Hence, it may not pay for the complete repair or replacement of a broken system or roof leak. In addition, there is often a dollar limit for different types of appliances specified in the contract.
A home warranty does not cover all repairs. For instance, some home warranties cover pre-existing or new electrical issues (incorrectly installed items or items that break) but not upgrades (changing one circuit to two separate circuit systems). In some cases, a home warranty does not protect the new homeowner if the previous owner had not performed proper maintenance on systems or appliances. Home warranties also do not always cover commercial-grade appliances. Thus, the house you bought with high-end luxury appliances may not be covered. The fine print is important!
A Home Warranty and Home Insurance Are Not the Same
A home warranty is not the same as home insurance. Instead, home warranties are service contracts. Home warranties protect you from breakdowns caused by regular use and aging of appliances and systems. This coverage is in addition to the standard manufacturer warranty. On the other hand, home insurance protects your home against loss and damages from unexpected events like fires, hail, certain types of water damage, trees falling on your house, etc. In addition, home insurance typically covers structural damage and losses to belongings in a home. For example, home insurance will not pay for a 10-year-old water heater that breaks down due to everyday use. On the other hand, a home warranty may pay for repair or even replacement of the water heater.
How Does the Home Warranty Work?
Homeowners pay an annual premium that is usually hundreds of dollars and may be higher depending on what is covered and the property type. Reportedly, the range is between $220 and $1,767 per year. In addition, homeowners will also pay a service call fee, also known as a trade call fee, of around $75 to $125. This cost is a fee you pay each time you call and ask for a service provider to come to examine and diagnose the problem.
For example, suppose the water heater breaks, you call the home warranty company. They will send a local service provider, and all it costs is $75 – $125. If the work takes 30 minutes or several hours, the cost is the same.
This is great if we consider that the total cost to repair a water heater may be several hundred dollars. The cost of replacing a water heater can range from $800 – $1,500 depending on the model, capacity, and features. For example, suppose you bought a home with a 10-year-old water heater, and it breaks within two years and needs to be replaced; you come out ahead if your annual premium is $500.
If you are buying an older home with older appliances and systems, a home warranty can save you quite a bit of money. Imagine if your stove, dishwasher, furnace, and AC are all nearly 20 years old. Most of these appliances and systems are near the end of their useful life and often need repairs. They all have motors, mechanical moving parts, and electrical components that wear out or break. Even with a $500 annual premium and one trade call fee per year, you can come out ahead, assuming one of these appliances break each year.
When is it a Good Idea to Buy a Home Warranty?
The primary reason to get a home warranty is if you are buying an older home with older systems and appliances. In this case, it can give you peace of mind about future breakdowns and repairs. The problem with buying an older home is that the appliances can be near the end of their useful life. So a home warranty can also be part of the deal. In addition, sellers may offer a home warranty to make a faster sale. It was certainly the case when we bought our home a decade ago. The appliances were newish but not new, but the water heater, furnaces, and AC were over 15 years old, and a home warranty for the first year was nice to have.
Another reason to buy a home warranty when purchasing a house is that you should always expect the unexpected. For example, in the first year, three of the four electronic ignitors of our natural gas stove stopped working. Imagine trying to cook for a family of four with only one burner working. A home warranty helped replace the ignitors and burner components only for the trade call fee.
A third reason to buy a home warranty is convenience. The home warranty company has relationships with plumbers, electricians, roofers, and other handymen. You do not have to do the research yourself to identify good handymen. Call the home warranty company for a service call, and they will send someone in their network.
Lastly, if you are not handy or have the time or ability to do repairs yourself, a home warranty may prove invaluable.
When Should You Not Buy a Home Warranty?
We did not get a home warranty when we purchased a newly built home. Everything was brand new, and we are not someone who buys a warranty plan to have it. The risk of a new item breaking is low and not worth the cost. Furthermore, the builder covers new construction for the materials and workmanship for a specified period. The manufacturer’s warranty covers new appliances. A home warranty will be duplicate protection.
Suppose the cost of having the home warranty is more than the expected return on repairs. Even if the home you are buying is not new, a home warranty may not make sense if the appliances or systems are new. The home warranty cost will likely be greater than the cost of future repairs, at least in the near term.
Keeping a home warranty for the small ticket items like the garbage disposal and garage door opener does not make sense. It certainly does not make sense if you are handy since you can probably do the repairs yourself. Additionally, the cost of some of the items is often $200 or less and can be paid from an emergency fund.
Is a Home Warranty Worth It?
My opinion is yes, especially if you have an older home with more costly appliances close to their end dates. If the house is over five years old, the answer is maybe, but the answer changes to yes if the house is over ten years old or appliances are ten years old in a remodeled home. You will be covered if the furnace breaks, the water heater breaks, or the AC unit breaks. These items can cost between $500 to $5,000 to repair or replace depending on the brand and labor costs. Homes are costly to maintain, and a home warranty for an older home can offset the cost and provide some peace of mind.