Home warranties often provide peace of mind to wary home buyers, but are they worth the cost? Let’s look at how home warranties work and weigh the pros and cons.
Home warranty basics. Home warranties provide for the repair of certain systems in a house in exchange for an annual fee of between $300 and $600. Although they are called warranties, they could also be viewed more accurately as service contracts. Besides the annual fee, homeowners typically pay a fee for each service call, often in the range of $75. The repair contractor is selected by the warranty company, not the consumer. The policies also have limits on what they cover and sometimes an overall limit of what they will pay in a year. As with any legal contract, the consumer must read carefully and understand what they are buying.
Pros and cons. Some consumer advocates say home warranties rarely provide the coverage they promise. Specifically, consumer advocates say that home warranty companies can be difficult to work with and find reasons to deny claims. Consumer satisfaction surveys tend to support those concerns. The home warranty industry has one of the highest complaint records in the country. A better approach, consumer advocates say, is for homeowners to set aside money each month for future repairs.
Protect yourself. Consumers can protect themselves in the purchase of home warranties in two ways. First, research each company. Make sure to read the reviews of previous customers and consumer protection organizations like the Better Business Bureau. Find out if your state requires home warranty companies to be licensed, then verify the licenses of each company you are considering and carefully read any complaint records against them.
Second, be sure you understand the policy. Verify what is covered and by how much. Understand limits to coverage, service call fees and what is required of you, such as maintenance of covered systems.
When does a home warranty make sense. When a newly built home is purchased it is common for the builder to offer a warranty in three stages. The first year, the builder typically handles repairs for anything that goes wrong with the home, except for appliances, which are covered by their respective manufacturer warranty. The heating and air systems also are covered by the manufacturer’s warranty. During the second year, the builder typically covers most of the major structural components, such as the roof, frame and foundation. After the second year, coverage is usually handled by a home warranty contract that the builder purchased on behalf of the homeowner, which often lasts several years, perhaps up to ten. This contract is usually transferable to a new owner.
For older homes, a contract can be purchased at any time. It has become common in the real estate sales industry for sellers to provide a home warranty contract for a buyer in order to give the buyer peace of mind about the purchase. Often the promise of a home warranty can help motivate a buyer. It is important to note that repair needs found during the home inspection process will not be covered by a home warranty and must be repaired beforehand.
