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Do I Need A Home Warranty When Buying A House?

Dec 4, 2019 8:00:00 AM

Learn why a home warranty is an affordable, worthwhile expense that covers repair or replacement of common systems and appliances.

Do I Need A Home Warranty When Buying A House?

  1. What's Covered?
  2. When to Purchase?
  3. How Much Does it Cost?
  4. What's the Claim Process?
  5. Who Needs One?
  6. Any Drawbacks?

A home inspection is a critical part of the home buying process, but buyers often have a false sense of security that an inspector will find any and everything wrong with the home. An inspector can't look behind walls, and they can only report on the current condition of a home's systems and appliances. An HVAC system in good working order on inspection day could quit a month later.

A possible solution is to purchase a home warranty that covers repair or replacement of common systems and appliances. This can give buyers peace of mind that they won't be hit with costly out of pocket expenses right after moving in.

So how does a home warranty work, and do you actually need one when buying a home? Let's dig in.

What Does A Home Warranty Cover?

The first thing to understand is that a home warranty is not the same as homeowners insurance, which covers the structure of the home in the event of a fire, storm, flood, etc. A home warranty covers the repair or replacement of specific systems in the home, such as the HCAV, water heater, appliances, plumbing and electrical systems.

When you're considering a home warranty, you want to confirm exactly what is covered. Many home warranty companies will offer sample reports on their website so that you can see what's typically covered, and what is optional. For example, most home warranties do not cover pools or septic tanks, but additional coverage can be purchased. All warranty companies provide free quotes, and you can use these to compare coverage between plans and even between providers.

When Is A Home Warranty Purchased, And How Long Does It Last?

A home warranty can be purchased at any time during homeownership, but it's common for a buyer to purchase coverage at closing. Sellers may also purchase a warranty while their home is listed; these plans will cover the seller while the home is for sale, and then transfer to the buyer at closing. A seller may even advertise the inclusion of a home warranty in their listing as an added value, especially for an older home. And some lucky buyers will be gifted a home warranty from their real estate agent at closing!

Most warranties last for one year from the date they become active, and are usually renewable from year to year.

How Much Do Home Warranties Cost?

According to Consumer Affairs, the average annual premium for a home warranty plan is $300-$600. Prices vary based on location, as well as the type of property; single-family home plans cost more than a condominium. Some warranty companies do not differentiate coverage based on home age, so a warranty can be a great deal on an older home when it's inevitable that something is going to break.

When getting quotes, you will have multiple plans to choose from. Plans are usually broken down by system coverage, appliance coverage, or a combination of coverages. Premium or comprehensive plans, or plans with extended coverage may cost up to $1,000 per year.

In addition to the premium, most plans require a service fee of $50-$100 when the warranty company sends a trade professional out to inspect, repair or replace an item. Some plans only require this fee once, while others charge a fee for every service trip made during the same claim. Other plans have a deductible that has to be paid before repair or replacement is made, similar to insurance. Others have coverage limits. For example, if the coverage limit for a new air conditioning system is $5,000, but it costs $6,500 to replace your unit, you are responsible for the difference.

All of these factors affect your premium, but also your additional out-of-pocket expenses. Always read the coverage details (and fine print!) carefully before choosing a home warranty plan.

How Does The Claim Process Work?

Making a claim with your home warranty company is similar to any other kind of warranty or insurance claim:

  • If a covered appliance or system breaks, the homeowner calls the warranty company or files a claim online.
  • Warranty companies contract with local trade professionals for inspection, repair and replacement.
  • The warranty company will send out a technician to determine if repair, replacement or a payout is required.
  • The homeowner pays any service fees or deductibles, and the work is completed.

Simple enough, but this process can vary between companies, as can the level of customer service. When researching providers, look for one with a call center based in the US with office hours in your timezone. Also ask about the claim process, specifically how claims have to be submitted, and the promised turnaround for sending out a technician (within 24 hours is ideal!).

Who Needs A Home Warranty?

Buyers purchasing an older home benefit the most from home warranty protection; it's not a matter of if, but when aging systems will fail. When you consider that a few hundred dollars per year could cover a $2,000 refrigerator and a $5,000 HVAC system that break within months of each other, a home warranty is an affordable, worthwhile expense.

Home warranties are also ideal for buyers who have depleted their savings to buy a home, and they need time to rebuild their emergency fund.

If you're buying a new construction home directly from a developer, the systems and appliances are likely still covered by the manufacturer, and possibly even by the developer. In this case, you don't need a home warranty.

Are There Any Drawbacks To A Home Warranty?

All home warranties have limitations on coverage, but they are spelled out in black and white. It's critical to read the fine print, understand exactly what is covered, and choose a plan based not only on cost, but also on how you use your home and your expectations. For example, if you have high-end Viking kitchen appliances, don't choose a plan that has a $1,000 coverage limit for refrigerator replacement.

Some plans also give the warranty company the discretion to choose replacement appliances. If a specific make and model is important to you, be sure to choose a plan where the replacement has to be the same, or where the warranty company gives you a payout to purchase your own appliances.

One place where homeowners can get burned by their home warranty is under an improper maintenance clause. For example, if your HVAC quits and the service technician finds that it was due to the filter not being changed, they can deny the claim -- even if it was the previous owner who failed to maintain the system. Likewise, warranty companies can deny coverage on pre-existing conditions that were revealed in the inspection report. For example, if the inspector finds electrical wiring that is not up to code, and the seller does not fix it before closing, the warranty company could choose to exclude the electrical system from the coverage.

Finally, like any service provider, there are unscrupulous warranty companies and those that are unpleasant to work with. One unavoidable downside of any home warranty is that the homeowner does not get to choose the service technicians and contractors. You're stuck with the opinion - and the work - of the contractors that the warranty company partners with. However, a reputable warranty company makes customer satisfaction a priority and only partners with trusted, local trade professionals.

Bottom line: A home warranty is an affordable, worthwhile expense, particularly on older homes. Because there are many providers and plans to choose from, it's important to do your research and choose a plan that fits your budget while also providing the coverage you need.

Better yet, ask your agent! An experienced buyer's agent will help you decide if you need a home warranty, and will be able to recommend a reputable company and plan. Dwellful matches you with an agent you'll love. Guaranteed.

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Todd McClain

Written by Todd McClain

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