By Susan Doktor
The home warranty market is worth some $3.6 billion in the US today and has experienced
4.1% growth over the past five years. Home warranties are often purchased by homebuyers to
account for unexpected repair costs in older homes. They’re also purchased by home sellers as
an incentive to purchase and, on a psychological basis, suggest that a home buyer “stands
behind” his or her home. A full home warranty—one that covers both systems and
appliances—costs between $50 and $75 per month in Utah. That’s somewhat lower than the
national average.
What is a Home Warranty?
People often confuse home warranties and homeowners’ insurance. But a home warranty isn’t
an insurance policy at all. It’s a service contract that protects homeowners from shouldering
home repair costs alone. A home warranty won’t reimburse you for the expense of repairing
your roof if a tree limb damages it. It doesn’t protect you against damage caused by fire. It has
no liability component—it won’t protect you financially if someone is injured on your property
due to your negligence. Home warranties deal strictly with breakdowns in appliances and home
systems that result from normal wear and tear, not natural disasters or human error.
Let’s say a pipe bursts in your home and water damages the ceiling or carpet below it. A home
warranty will pay the cost of fixing the pipe. It will not pay to repair and paint your ceiling. It
won’t pay to have your carpet cleaned. That’s because ceilings and carpeting aren’t covered in
your contract. If you have homeowners’ insurance, you can make a claim for ceiling and carpet
damage caused by a plumbing problem.
If you have a mortgage on your home, you will be required to carry homeowners’ insurance.
Home warranties are strictly optional. But homeowners’ insurance and home warranties work
together to provide you maximum protection.
What Do Home Warranties Cover?
Some home warranties cover appliances only. Others only cover systems. The most
comprehensive (and most expensive contracts) cover both.
Systems-only contracts typically cover these systems as a standard or add-on coverage.:
● Plumbing
● Electrical
● Heating Systems
● Air Conditioning
● Water Heaters
● Central Vacuuming
● Duct Work
● Sump Pumps
Appliances-only contracts typically cover:
● Refrigerators and stand-alone freezers
● Ranges, ovens, and built-in microwaves
● Washing machines and dryers
● Garbage Disposals
● Garage door openers
Most home warranty companies offer optional coverage for pools and spas, septic tanks,
second refrigerators and freezers, and limited roof leaks. They allow homeowners to customize
their contracts and many package their services into several different bundles. The more
coverage a package offers, the more it will cost.
How Do Home Warranties Work?
When you contract with a home warranty company and something goes wrong in your home,
you call the company and make a claim. The company then sends a contractor to your home to
repair the broken system. It may take several days for the contractor to arrive. Each time a
contractor makes a service call to your home, you will be charged a fee. These fees typically
range between $75 and $125. They are akin to insurance policy deductibles or medical co-pays.
The home warranty company decides whether a covered item can be repaired or whether it
should be replaced with brand-new item.
What Constitutes a Good Home Warranty?
The best home warranties offer broad coverage, high coverage limits, low premiums, and
inexpensive service call fees. That’s a tall order. No matter which home warranty you choose,
you will have to make some compromises. Low premiums are often a trade-off for higher
service fees. Some companies allow you to choose your own service call fee as a means of
lowering your monthly premiums. Combination coverage for systems and appliances costs
more than appliance-only or systems-only plans.
One of the most important aspects of any home warranty is its coverage limits. Some plans
have an annual limit—the home warranty company will only pay up to a certain amount during
a calendar year. All warranties have a per-system or per-appliance coverage limit. For example,
your contract may specify a $3,000 limit on heating systems. Should you need to replace your
furnace, you’ll only get $3,000 from your home warranty to get the job done. Furnaces can cost
upwards of $7,000. So even if you have a home warranty, you’ll be on the hook for any costs in
excess of your coverage limits. Does that mean home warranties aren’t worth the price? Not at
all. If you’re only paying $600 per year for a home warranty, that $3,000 payout on your
furnace makes your contract a good investment.
Home Warranty Guarantees
Before selecting a home warranty, check into the promises a home warranty companies makes
to you. The best home warranties guarantee that a service person will be dispatched to your
home promptly—usually within 48 hours of your filing a claim. Service call wait times can be
very important. Let’s say your furnace gives out in the middle of a serious cold spell. You
wouldn’t want to live without heat for a week, would you.
When comparing home warranties, be sure to find out what kind of workmanship guarantees
they offer. Workmanship guarantees can last as long as a year, but that’s pretty rare. Most offer
guarantees of 30 days, after which, if a problem reoccurs, you will need to make another claim
and pay another service fee. Look for the longest guarantee you can find. Bear in mind that you
will not get to choose the contractor who comes to fix your leaky pipe or broken-down washer.
A home warranty company that offers a long warranty has faith in the quality of work its
contractor network provides.
Home Warranty Waiting Periods
When you sign up for a home warranty, it’s very rare that the issuer will require a home
inspection before covering your home. To protect themselves from having customers buy a
home warranty right after something expensive breaks down, most companies impose waiting
periods—generally between one and thirty days. That means you can expect to pay your first
monthly premium and receive no coverage for a while. When you consider whether a home
warranty is worth it, you should factor your waiting period into your calculations.
Home Warranty Exclusions
Home warranties don’t cover everything. And not standard home warranty plans cover the
same things. Before you sign up for a home warranty, it’s imperative to read the fine print and
understand the exact amount and kind of financial protection you’ll receive under its terms.
Pre-existing conditions are not covered. Items that have been subject to extreme wear and tear
or neglected aren’t either. Sprinkler systems are excluded from a typical home warranty, as are
second refrigerators. Your home warranty will not pay for repairs that are necessary to bring a
property up to building codes.
Home Warranties for Newly Constructed Homes?
As a home builder, you already offer a new construction warranty on the homes you sell. Why
would you need another? Builder warranties usually offer a one-year warranty on materials and
labor, a two-year warranty on heating, plumbing, AC, and electrical systems, and a ten-year
warranty on structural elements like load-bearing walls, roofs, and foundations. A builder’s
warranty may not cover household appliances.
Builders can gain a competitive edge, by not just offering a standard builder’s warranty but also
extended coverage through a new home warranty, purchased from a company that specializes
in this type of service contract. Even if you don’t cover the cost of a new home warranty for
your homeowners, they’ll appreciate knowing their options and your transparency around what
is and isn’t covered by a builder’s warranty.
Author Bio:
Susan Doktor is a journalist who covers a wide range of personal finance topics. She often
writes about mortgages, real estate, consumer credit issues, and insurance. Her contribution
comes to us courtesy of Money.com.
