There are quite a few upfront costs associated with buying a home, including the down payment, closing costs, and moving expenses. Those are all expected. When moving into a home, the last thing homebuyers need is a large, unexpected expense on top of those.
That’s where a home warranty comes in. A home warranty offers limited-time protection against the failure of a home’s systems – heating and cooling, electrical, plumbing, and sometimes appliances. It is different from homeowners’ insurance, which covers accidents, theft, and damage caused by weather events.
There are some limitations to the warranty coverage, and, like most consumer protection plans, there are pros and cons. Here are some of the main things to consider if you’re asking yourself whether you need a home warranty.
Peace of mind
Again, moving into a new home and having to quickly do a major repair or replacement can be near-devastating financially. Having a home warranty, even for a one-year term, can give you peace of mind that a huge financial hit is less likely on the immediate horizon.
Actually, a home warranty might provide just as much peace of mind to the seller. It protects them against homebuyers pursuing them in court should something major go wrong soon after the sale. If a major system needs to be overhauled, a seller could be called into question over whether they properly made the required disclosures in the sales agreement.
That’s why it’s often the seller who purchases a home warranty on the buyer’s behalf when the house is sold.
If a seller is offering a home warranty – most likely a one-year plan – there’s nothing much to lose. But when the original time period expires, it’s the buyer who will have to renew by paying a premium to keep the coverage.
Annual costs for home warranties are usually in the $400 to $600 range. If instead of paying that premium each year, you were to sock that money away into an emergency account, you could build a fund that could be used for home repairs down the road. And cash gives you more flexibility than a warranty does.
Also, any claim made during the warranty period will result in a house call arranged by the warranty company, which will charge you a fee that’s out-of-pocket, not covered. For a minor repair or replacement – a garbage disposal, for example – that fee could be as much as what you’d pay to replace it on your own. You would have paid the annual premium for basically nothing.
The age of the home
If you’re buying a home with a 15-year-old furnace and air conditioner, a home warranty is more practical than, say, one on a home with a two-year-old HVAC system. Older components are simply more likely to fail.
But there’s a catch to that, too. Home warranty companies have a reputation for denying claims for systems that have not been thoroughly maintained. So your 15-year-old furnace could break down, and your provider could determine that it wasn’t properly maintained by the previous owner of the home. It would be difficult for you to prove otherwise.
Also, the warranty company picks the contractor who comes to your home to examine the problem. You do not get to choose your own contractor.
If the home seller wants to provide a warranty, it certainly doesn’t hurt. But paying to renew one on a newer home just doesn’t make as much sense as on an older home, for which claims can be trickier. It can be a Catch-22.
The bottom line
Home warranties can provide peace of mind both to the buyer and the seller of a home, and if the seller wants to provide the homebuyer with one, there’s no harm. But the buyer should be aware of the warranty’s limitations and full costs before spending money to renew the coverage each year.
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