Pros and Cons of Home Warranties

Home warranties are typically given to new construction homeowners by builders, purchased at resale, or, bought after closing by new homeowners. Extended home warranties vary in coverage from company to company and builder to builder. However, in general, these products are designed to give homeowners peace-of-mind in the event an appliance or system breaks down. Such unplanned problems can cost a substantial amount of money for repair or replacement, and, an extended home warranty is supposed to provide protection.

Pros and Cons of Home Warranties

When you buy a home or are ready to list a property for sale on the local market, you might consider buying a home warranty. Unlike the name implies, an extended home warranty doesn’t cover the home itself — your property is given coverage under your homeowners insurance policy. Instead, home warranties provide coverage for common appliances and the major systems. These generally include: central air and heat, washing machines, clothes dryer, garbage disposals, electrical wiring, water heaters, stoves and ovens, plumbing, garage door openers, dishwashers, refrigerators, built-in microwaves, smoke detectors, and ceiling fans.

Whether you are buying your first home or selling a home and moving into another, a home warranty could be a valuable protection for your finances and your peace of mind. Many buyers opt to purchase home warranties, which average $350 to $500 for a basic warranty and $100 to $300 more for a warranty with extra protection. Buyers, particularly first-time buyers, like the fact that they can rely on a warranty to pay for repairs during the first year while they are settling into a new home. —Realtor.com

The average cost of an extended home warranty ranges between $350 to $500 per year. Coverage may also be “enhanced,” meaning providing extra protections for certain items. This enhanced coverage comes at an extra cost of $100 to $300 per year and policies are sold or renewed annually. Sellers generally purchase a home warranty to make their properties more attractive to buyers, while new homeowners purchase these policies to avoid costly repairs. That’s the single largest benefit of an extended home warranty, but another is discounted service call fees. However, there are distinct drawbacks to home warranties:

  • Repair and service call fees aren’t included. Though you’ve purchased coverage for systems and appliances, you’ll probably have to pay a fee for any service repair call, ranging from $50 to $75, which is equal to what you would normally pay for such service. The advantage is that parts and labor might be included, but this isn’t always the case.
  • Home appliances rarely breakdown. Home appliances and modern systems are very reliable and rarely breakdown. In fact, technological advances make appliances work more efficiently, provide more function and longevity. Statistically, only 1 and 5 homeowners experience appliance breakdown within the first three years.
  • Poor return-on-investment. When you purchase a home warranty, you’ll pay up-to $800 per year for an enhanced plan. In just three years, if you saved the same amount, you’d be able to pay cash for any appliance or system repairs.
  • Other coverage might apply. New appliances typically come with a one-year manufacturer’s warranty and builders also provide warranties for new construction homes. In fact, builders are required by the state to provide certain coverage for many years.
  • Not everything is covered. If you take the time to read the entire policy, along with its disclaimers, you’re likely to find that not everything is covered. While certain things will be covered by the policy, there are usually others that will cost you out-of-pocket.

This doesn’t mean that extended home warranties are always a bad choice to purchase. For instance, if you have high-end appliances that cost thousands of dollars each, a home warranty might be a good investment of risk transfer.