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Are home warranties worth it?

Bankrate logo Bankrate 8/1/2019 Barbara Whelehan
a man cooking in a kitchen: A technician fixing an appliance© GeorgePeters/Getty Images A technician fixing an appliance

Imagine that a week after moving into your home, you turn on the air conditioning and it doesn't work. Or your dishwasher suddenly quits or the furnace goes out in the dead of winter.

These hiccups can be stressful, inconvenient and, above all, expensive. Not exactly something a new homeowner wants to face after putting down a bundle to buy a home.

Purchasing a home warranty, though, can help alleviate some of the financial burden new homeowners face when a major appliance or home system goes out. Yes, you'll pay for a warranty upfront but the savings could be worth the added expense. Here's an overview on what a home warranty is, how much it costs and if it's worth it.

What is a home warranty?

A home warranty is not an insurance policy, but rather a service contract that pays the cost of repair or replacement of covered items, such as major kitchen appliances, as well as electrical, plumbing, heating and air conditioning systems. A warranty doesn’t cover windows, doors or other structural features. Separately, homeowners insurance covers losses incurred if your home and belongings are damaged or lost due to fire, theft or other perils.

“The warranty is designed to cover items that are in satisfactory, good-working condition upon occupancy, and then fail due to normal wear and tear,” says Mike Sadler, vice president of operations at America’s Preferred Home Warranty, based in Jackson, Michigan.

At her listing appointments, Coleen Smith, a real estate agent with Portside Real Estate Group in Falmouth, Maine, routinely suggests getting a home warranty to home sellers as a way to attract prospective buyers. She also recommends them to buyers.

“It depends on what I hear my clients saying their potential pain point is," Smith says. "What is their concern or heartache about a property? Someone might say, ‘I love this house except it’s on private systems, like a septic tank or a well, and I don’t want to deal with it if it breaks.'”

Are home warranties worth it?

The cost of a home warranty ranges from $350 to $600 a year - more if you want enhanced coverage for such things as washers and dryers, pools and septic systems. In addition to the annual premium, expect to pay a fee for service calls - anywhere from $50 to $125, depending on the type of contract you purchase.

Without a home warranty, you could spend hundreds or thousands of dollars repairing or replacing major appliances or systems. If you don't have money set aside for these expenses, a home warranty can more than pay for itself.

According to HomeAdvisor, here are the average national costs to replace some major home systems:

Central air conditioner: $5,467

Furnace: $4,286

Water heater: Tank – $889 (40 to 50 gallon tank); Tankless – $3,000

Appliance repair: $170 (most homeowners spend between $104 and $237)

Who should buy a home warranty?

If you're buying a previously owned home, you might consider getting a home warranty from a reputable company, especially if your home inspection reveals that several of the home's appliances and systems are nearing their life span. Make sure you understand the terms and conditions of the home warranty, how long the coverage lasts and what it will and will not cover.

Home sellers might want to consider offering a home warranty to buyers to sweeten the deal. In the event a major appliance suddenly stops working, it can be repaired or replaced at little cost, which a new buyer will appreciate.

When to skip a home warranty

Homebuyers who purchase new construction usually get some type of warranty from the builder for the home’s materials and workmanship, including plumbing, electrical, heating and cooling systems for one, two or up to 10 years.

Appliances are often not covered by the builder, but they generally come with a manufacturer’s warranty. In other words, it's not worthwhile to purchase a home warranty for a newly built home because you'll wind up with duplicate coverage.

Also, some credit cards offer extended warranties on top of the manufacturer’s warranty with new appliance purchases, so if you remodel your kitchen and pay for new appliances with a credit card, it may not make sense to buy a home warranty for those appliances.

Pros of home warranties

A warranty can provide peace of mind to those purchasing a home with used appliances and older systems. Plus, if you're new to an area, it's unlikely you'll have established relationships with local contractors or mechanics to help with repairs. Your home warranty company generally takes care of finding and hiring a trusted technician.

Not all homeowners have the DIY skills to handle repairs on their own, so having a home warranty to fall back on alleviates that worry. And older homeowners might appreciate the convenience of making a single phone call if something breaks or falls into disrepair.

Cons of home warranties

It’s imperative to know what’s covered and what’s not. Check the protection plan to see the list of exclusions and to determine if you want to upgrade your contract.

Some potential drawbacks:

  • Home warranty companies impose dollar limits per repair or per year. This can vary greatly, and generally, the sky is not the limit.
  • Claims can be denied by the home warranty company if an item has not been properly maintained, and this can be a sore point since a record of proper maintenance may be difficult to provide, especially for homeowners who just assumed occupancy of a home. Be forewarned that some home warranty firms use "improper maintenance" as an excuse to dispute justifiable claims.
  • Home warranty companies determine whether to fix or replace a system, and you may or may not agree with the decision.
  • If an appliance needs to be replaced, the homeowner in some cases may not have a say about the make or model of the replacement.
  • Under certain circumstances, such as a power surge, an appliance likely will not be covered.

Beware of home warranty reviews

Be wary of online search results for home warranty reviews. Some appear to be sham rankings, likely paid for by the touted companies.

For instance, some sites with generic domain names pop up in a search, ostensibly listing the best home warranty companies. One company appears as “best overall” on one site and is the top-listed home warranty company on another site with a slightly different domain name. But if you look up the company on the Better Business Bureau’s site, it has received more than 10,000 complaints in the last three years, and more than 4,000 in the last 12 months alone. Despite these complaints, it gets a B rating from the BBB.

Don’t trust the customer testimonials that appear on a home warranty company’s website. You will likely find mostly five-star ratings and rave reviews. One company offered glowing reviews on its website, but at the BBB’s website, the firm received a one-star rating on average based on 593 customer reviews. It, too, gets a B rating from the BBB.

The BBB’s ratings are based on:

  • The number of complaints.
  • The size of the business.
  • How well the business responded to complaints, how quickly the complaints were resolved, and whether the business made a good faith effort to resolve complaints.

A better approach might be to look at BBB’s website for companies rated A or A-plus and contacting them directly.

Bottom line

If you decide to go with a home warranty, be sure to check its rating with the Better Business Bureau, and don’t assume a B rating means “above average.”

Also take the time to closely review the contract describing standard coverage, optional coverage and upgraded items. Understand the limitations. It may not be necessary to pay a higher premium for optional or upgraded coverage.

Premiums, exclusions and caps on benefits vary widely, so shop around.

Consumers have a choice of paying annual premiums for peace of mind or building an emergency fund for unexpected expenses later on. It may be better to rely on an emergency fund than to pay annual premiums for a home warranty contract that may or may not be needed.

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