The first thing you need to know about home warranties is that they are neither insurance nor warranties. They are, in reality, service contracts.
They were created to provide financial protection for homeowners faced with the failure of major mechanical systems, such as the home’s heating and air conditioning. Home warranties provide, most of all, peace of mind.
What does a home warranty cover?
Home warranty companies offer a variety of plans and typically the more you pay, the more your plan covers. Most of the basic warranties – first tier and second tier plans – cover the following:
- HVAC System – heating, ventilation and air conditioning system components such as heat pumps and ductwork.
- Plumbing – all of the home’s interior plumbing system components such as pipes, drains, and faucets. Some home warranty plans cover outdoor plumbing as well, such as the sprinkler system. Some companies offer a separate policy for hot tubs and pools.
- Electrical system – wiring, doorbells, electrical panels and other electrical system components are covered under either Tier 1 or Tier 2 plans.
- Major appliances – the basic plan typically covers the range, refrigerator, garbage disposer, washer, dryer and water heater.
Ah, those nasty “exclusions.” Just like your health and homeowners insurance even a home warranty contains them. Not everything in the home is covered under a home warranty. Like inclusions, exclusions vary, depending on company. The following are some common home warranty exclusions:
- Normal wear and tear
- Problems that arise from deferred maintenance
- Insect or vermin damage
- Damage caused by the homeowner
- Structural problems (leaky roof, cracks in walls)
- Acts of God (earthquake, flood, etc.)
Optional coverage, at additional cost, is usually offered for:
- Well pump
- Septic system (if you have one, this is highly recommended)
- Central vacuum system
How much does a home warranty cost?
Since the price of a plan varies for several reasons, and it also depends on whether the buyer pays an annual lump sum or makes monthly payments, here’s no single answer to this question.
When paying a lump sum, the average starting cost for a basic plan is $413.89 per year. On the high end of the price range, comprehensive coverage averages $799.82 per year.
“A home warranty will typically cost a homeowner between $264 to $1,425 per year, with a national average cost of $600,” claims Meghan Wentland and Evelyn Auer at BobVila.com.
Here’s how the home warranty typically works
In the event of a mechanical failure or appliance problem, you will place a call to the home warranty provider’s service department who will then send out a service technician of their choosing.
The technician then bills the home warranty company directly, but you will be required to pay a service fee (think of this as akin to a health insurance co-pay) each time a repair person comes to the home.
The nationwide average service fee price range is $55 to $150, according to Wentland and Auer.
Many home warranties not only cover repair but replacement of appliances as well, meaning that if it can’t be repaired they will install a new one.
Are home warranties worth their cost?
This is a hotly debated topic among real estate agents. Some say they aren’t worth the paper they are written on.
Many more say that because of the peace of mind they offer new homeowners, they are absolutely worth the purchase.
Especially during the first year you are in your new home, when you may be strapped for cash, a home warranty may be well worth the price of it. When a major system in the home malfunctions, the price to repair or replace can devastate your savings. A home warranty offers both peace of mind and financial security.