When you’re buying a home, you may be given the option to purchase a home warranty.
While the specifics can vary from policy to policy, home warranties are generally designed to cover the costs of repairing or replacing home appliances and mechanical systems at a discounted rate.
As you decide whether a home warranty is a good option for you, consider the following questions:
What does a home warranty cover?
A home warranty is a service contract between a homeowner and a home warranty company. It is neither the same as homeowners insurance nor a replacement for insurance. Unlike homeowners insurance, which can cover damage caused by natural disasters or property crimes, home warranties offer discounted repair and replacement of broken-down mechanical components and appliances in a home, including the furnace, the air conditioning and electrical systems, refrigerators, washers, and dryers.
Generally, the home warranty company will send out service contractors to repair faulty appliances or mechanical and electrical systems. If an appliance or system is beyond repair, the company will provide a replacement. In both instances, the homeowner is responsible for a deductible (in addition to the cost of the warranty itself).
Who needs a home warranty?
Dominic Cardone, a broker and Realtor at Keller Williams in Media, Penn., has been in the real estate business for more than 30 years, and he has been a proponent of home warranties for his whole career. “It’s like health insurance and car insurance,” he says. “It’s a good precaution to take.”
Purchasing a home warranty, which can cost around $400 to $600 a year, is especially beneficial for those buying an old home or a home with aging appliances and systems, Cardone says.
First-time homebuyers can also find peace of mind with a warranty. “They don’t need that surprise that first year,” explains Cardone, who is also a regional vice president for the National Association of Realtors. “[A home warranty] just takes the edge off potential problems.”
Home sellers can also purchase a home warranty for the competitive edge it offers in the housing market. As soon as the home gets sold, the warranty coverage transfers to the next homeowner, thereby offering homebuyers more coverage.
“I just find from my point of view that it helps everybody in the real estate transaction,” Cardone says.
What’s the downside to a home warranty?
As with any product or service, there are potential pitfalls, so it’s important to read the fine print and know what claims would qualify in any given warranty.
“They don’t cover everything,” Cardone warns. For example, if there’s flooding in a basement, a home warranty may fix a broken plumbing unit that caused the flooding, but it would not cover other kinds of damage caused by the flooding, such as mold or a broken window. Those issues fall under homeowners insurance.
Homeowners should also look out for additional fees and exclusions. Additionally, be aware that in some cases, a homeowner and the warranty company could disagree on the merits of a claim as well the brand and model for replacements.
However, in Cardone’s experience, “the horror stories you hear are the exceptions.”
“I’ve heard from buyers who regretted not having a home warranty,” he says. “I never hear people say, ‘I wish I never bought a home warranty.’”
Ilyce Glink is the author of ten books, including the bestselling 100 Questions Every First-Time Home Buyer Should Ask. Her nationally syndicated column, “Real Estate Matters,” appears in more than 125 newspapers and Websites, and her online “Ask Ilyce” columns are read by hundreds of thousands of people every month. She is a top-rated radio host on WSB Radio in Atlanta, the Home Equity blogger at CBS MoneyWatch.com, host of the Internet program “Expert Real Estate Tips,” managing editor of the Equifax Personal Finance Blog, and publisher of ThinkGlink.com.