Home Warranties: What are they and do you really need one?

A home warranty is not much different from a warranty you might have on your car, your computer or your home entertainment center. A warranty on your home usually covers all of your home’s major mechanical systems, including hot tubs, pools, wells, septic tanks and all of your appliances. Some policies even cover the roof of your home and almost anything else you’d like to include, as long as it’s specified in the policy.  

Home warranties, similar in some ways to insurance, are obtainable for most any dwelling, including mobile homes, condominiums, town houses and manufactured homes. They can be purchased by either the buyer or the seller; some sellers will include a home warranty policy to make purchasing their home more attractive. Including a home warranty with the sale is an excellent idea, especially if the home is older and the systems and appliances are aging. Since the policy can be purchased at closing, the seller doesn’t have to come up with the premium out of pocket. Further, the cost of the policy can be split between the buyer and the seller, depending on the terms of the sale.

Home warranty policies are generally effective for one year and are renewable. However, you can expect to pay a little more for coverage each year, as the items covered continue to age. This is reasonable. Policy costs vary according to the list of things covered, but an average cost would be between $350 and $500 per year. Obviously, when obtaining a policy it is important to be specific about coverage. You can expect to pay a small co-payment (or deductible) when the repair person responds to make a repair. This is an industry standard. Your payment will range from $35 to $55 per visit.

According to a Gallup poll, 79% of buyers and sellers surveyed rated home warranties as one of the most important aspects of buying a home. These policies are not like hazard insurance, which covers losses due to fires, storms and accidents; home warranties cover normal wear and tear breakdowns. A new home and its major systems are usually warranted by the builder for at least one year; thereafter, your home warranty policy coverage will take effect.

Be sure to understand the limitations and intent of your home warranty. For example, should your microwave oven catch fire and damage your kitchen cabinets, your home warranty would cover the cost of the microwave; your home owners insurance would pay to fix the cabinets.

Before buying your home warranty policy, you should shop around and find the best and most cost-effective provider. Get recommendations from your real estate agent, your mortgage company, your builder, your friends, and from the Better Business Bureau. Obviously, some companies are better and more reliable than others. Ask specific questions: Do they subcontract their work? What is their normal response time? If your freezer stops running you need someone to respond quickly.

When trying to decide whether or not you need a home warranty, the rule of thumb is: the older your home, the more you will benefit from a home warranty. Most systems and appliances covered under a home warranty can be expected to last at least 5 years. Therefore, during the early years of your new home, the home warranty policy may not be necessary. As the components of your home age, the need for a home warranty policy becomes more critical. It is obviously more attractive to pay $400 or $500 in policy premiums than shell out several thousand dollars for a new furnace or even several hundred to a thousand or more for a new refrigerator. The policy will easily pay for itself if a major home system has to be repaired or even one major appliance has to be replaced.

If you’re the owner of rental property, you should definitely consider a home warranty policy. Unlike the appliances and systems in your own home, you have little, if any, control over the frequency and manner in which these things are used by your tenants. Odds are you will have to replace or repair items and systems more frequently in your rental property than in your own home. As a landlord, your home warranty policy may very well save you money, but just as importantly, it can buy you peace of mind.