Buying a home will probably be the most expensive purchase you make. In addition to the down payment and mortgage, homeownership comes with a host of expenses renters don’t face. These include property taxes, homeowners insurance payments, and utility costs.
Homeowners must also pay for the home’s maintenance and repairs. These can add up to thousands of dollars a year.
It’s no wonder many people buy home warranties to protect their purchase and save money. But is a home warranty necessary? What does it cover? And do its benefits outweigh the cost?
A professional realtor is your best source for answers. Clever Partner Agents are experts in all facets of real estate, including the costs and benefits of home warranties.
Here’s our guide to home warranty insurance and its cost.
What Is a Home Warranty?
A home warranty is a paid policy that covers the cost of repairs or replacement, if necessary, of damaged appliances and major systems in your house or condo. What is covered under a home warranty depends on the specific terms of the policy.
It can cover appliances such as refrigerators, ovens, dishwashers, washers, and dryers. You can also get home warranty coverage for the plumbing, pipes, and electrical system. Other coverage can include heating, ventilation, and air conditioning functions. There are also home warranty policies for pools and spas, roofs, wells, and septic systems.
How Does a Home Warranty Work?
A home warranty is a service contract like any insurance policy. You pay an annual or monthly premium, just like you would for car insurance. If one of the items under warranty breaks down, you can file a claim. The home warranty insurer will then send a technician to your home to assess the problem.
Is a Home Warranty Worth the Cost?
Home warranties can cost as much as $1,000 a year, and warranties with enhanced coverage can add another $500 dollars to the final bill. The main reason people buy home warranties is for ease of mind. A policyholder does not have to worry about an unexpected bill if there’s a problem with a major appliance.
But a home warranty is not necessarily the most cost-effective way to pay for home repairs and maintenance. If your appliances and home systems are new or in good condition, you can save on annual home warranty costs by paying for potential repairs out-of-pocket.
You could set up a personal fund rather than pay for a home warranty. In other words, you could self-insure. This requires that you put money into a fund each month or annually that would be the equivalent of what you would pay for the home warranty.
Another guideline is to put aside 1% of your home’s purchase price each year for a maintenance and repair fund. After a few years, you should have enough to cover any major appliance breakdowns. This is risky, however, especially early on when you are still building the fund because you will be responsible for all repair costs if a major appliance breaks down.
Some repairs are not cheap. For example, a new air conditioning unit can cost more than $10,000. Similarly, electrical or plumbing problems can cost thousands of dollars to fix. You need to weigh all potentialities when deciding if a home warranty is right for you.
Read the Warranty’s Fine Print
Some of the biggest complaints about home warranties concern denied claims. That’s why it’s important to carefully read your warranty insurance contract. It’s the final word on what is covered and what is not. You also need to ask about service fees. Sometimes they can be so costly that it’s better not to make a claim and just pay for small repairs yourself.
There may also be a cap on coverage for individual repairs. In other words, the policy may limit coverage to a maximum payment for specific repairs, even though it may not fully cover the repair or replacement costs.
How Is a Home Warranty Different from Homeowners Insurance?
Both homeowners insurance and home warranties cover unexpected home repair costs. The difference is that homeowners insurance is not for regular wear and tear like a home warranty. It covers only incidental damage to your property and belongings due to accidents, theft, fire, and other hazards.
Homeowners insurance is usually required to secure a mortgage when you buy a home, but a home warranty is not. A Clever Partner Agent can tell you more about the pros and cons of home warranties. They buy and sell homes every day and they know the issues homeowners in your area face when it comes to repairs and maintenance costs.
Clever partners with top real estate agents from major companies like Keller Williams, Century 21, and RE/MAX. They are all full service and can help you decide if the cost of home warranty insurance is worth the benefits.