If you’re like me, you’ve been seeing commercials for extended home warranties and wondering if they’re a good investment. These home warranties are supposed to go beyond the coverage that you get with the usual homeowners insurance policy. They are warranties that are offered by third party companies that will pay for repairing, and, if necessary, replacing, covered appliances and home components, such as plumbing, should problems arise. So are home warranties a smart idea?
The average homeowners insurance policy will cover losses if your home and its contents are damaged or lost because of theft, fire or other disasters. The average builders warranty, which usually comes with a new house, will cover some repairs or some replacement costs of structural elements or contents of the house, usually for one year or more after the house is built. Many reputable contractors will cover the house for several years after the house is completed. When investigating your contractors, make sure you ask their references how the contractor handled repairs that may have been needed. And, you should, of course, get a written warranty for their work.
As a general rule, most home appliances and systems typically have at least one-year warranties. And most states require builders to warranty the home’s structural elements for up to 10 years (check with your state to be sure).
Here’s something I just learned… when purchasing appliances and other items with certain credit cards, the credit card company will extend the manufacturers’ warranty, usually up to 12 months after the purchase. Several popular credit cards, including American Express and Chase credit cards, offer those extended warranties. One of the best cards for extended warranties, as of the recording of this podcast/post, is the Citi Double Cash card, which will provide an additional 24 months of protection, no matter how long the manufacturer's warranty is. In most cases to take advantage of these extended warranties, you'll need to keep the original receipt, your credit card receipt, and the warranty details.
So, with the builder’s, manufacturers’ and credit card warranties in place, you may not want any additional coverage, especially for a new house. But as your house gets older, or if you are purchasing an older home, a home warranty might make more sense. Or it may not…
Consumer Reports has long recommended that consumers avoid purchasing home warranties (and most warranties, for that matter), and instead, put the money they would otherwise spend on a home warranty, into a savings account dedicated to repair and replacement expenses. That way, the money is in the bank, accruing interest, waiting for you whenever you need repairs. With a personal repairs and replacement savings account, you won’t risk paying for a plan that may not provide the coverage you expect.
To be clear, a home warranty may not pay for 100% of repairs, but good policies can help cover a portion of the cost if things break down.
These warranties may be a good idea if you know you are not a saver. If you are not someone who puts money away for a rainy day, a home warranty could be a smart investment. If you are more likely to make payments to a company than make deposits into a saving account, consider the home warranty.
You’ll need to pull money from somewhere to cover items in your home as things get damaged or worn out over time. That somewhere could be a personal, rainy day savings account, if you’re a good saver, or it could be a home warranty company with a great reputation. But be warned, finding a reputable company can be a challenge.
Be sure to investigate any company you’re considering before actually purchasing their home warranty. Resources for researching a company’s reputation include:
1. Online reviews of the company. Google the company's name and "reviews".
2. Better Business Bureau
3. Your state attorney general’s office
4. Your state insurance commissioner’s office. You can locate your state’s insurance commissioner’s office by Googling the National Association of Insurance Commissioners, going to that site, and locating your state on their map tab. Although home warranties aren’t considered insurance policies, many states require companies offering warranties to register or be licensed by the state’s department of insurance.
As an aside here, you can contact your state insurance commissioners office any time you have a complaint about an insurance company. A few years ago, when my homeowners insurance denied a claim that I put in for a new roof due to hail damage, I called my state insurance commissioner. They investigated and a couple months later, I got a check in the mail from my insurance company for the cost of my new roof. I didn’t have to pay the commissioner’s office anything. I just explained my case and supplied some documentation.
Most complaints regarding home warranties come as a result of the wide gap between what the customer expects and what the plan delivers. Before buying a home warranty, read the contract and understand exactly what it does and does not cover. For example, some contracts will not provide coverage if:
Here are some assumption you should not make about home warranties:
When you read the warranty contract, look carefully for exclusions and limitations. For example, the refrigerator might be covered, but the ice maker could be excluded. And claims might be rejected because of pre-existing problems or insufficient maintenance.
Questions to ask before you buy a home warranty:
1. Do I already have enough warranty protection? Think about the warranties that you have with your contractors, the product manufacturers and your credit cards. Do you really need more protection?
2. How much will it cost? The answer depends on the kind of plan you buy and the provider you choose. You can generally purchase one of three kinds of plans: a home warranty for one particular appliance, for all your appliances, or for your appliances, as well as your home systems, such as plumbing and electrical systems.
Prices vary depending on the coverage you choose. A plan that covers most major appliances might $200-$350 annually, while one that also includes your home’s electrical and plumbing systems could be more than $800.
Extra “Enhanced” plans can be purchased for another $100 to $300, and provide added coverage for such things as a washers and dryers, the air conditioning system, and garage door opener. You’ll also usually have to pay extra for coverage of swimming pools and septic systems.
Besides the cost of the plan, you might also have to make a co-payment when a contractor comes in to do the work. Fees range from around $60 to $125, depending on the work that needs to be done.
3. Am I clear about what the warranty covers? The Better Business Bureau reports that most complaints they receive are because consumers don't understand the coverage their home warranty plans provide. Sometimes companies have very specific circumstances under which they will cover damages. For example, an oven may not be covered if it stops working while in self-clean mode or if it is damaged by a power surge.
4. How much will the company pay for replacements? If a repair is considered too expensive, many home warranty companies might offer to replace a broken item instead. BUT, the home warranty company may give you only the depreciated value of the appliance or component, requiring you to pay the difference to get the same model you had before.
5. Are there limits as to how much a plan will pay out? There usually are limits to what the company will pay out. Some plans, for example, will pay up to $2,000 over a year membership term to access, diagnose, repair, or replace one covered item. And unless otherwise stated, many warranties will pay a maximum for all covered items, on average around $10,000 maximum.
Like insurance companies, many home warranty companies do their best to avoid fully paying claims. The fewer claims they pay, the more profit they make. It's important that you choose a company with a history of fair payment of claims. You’ll also want to choose a home warranty company that has been around for while and is likely to be around for the foreseeable future.
I am personally not going to invest in a home warranty. That’s because I’m building a new house with contractors warranties, I’ll pay for many of my appliances and components with a credit card with an extended warranty, I plan on buying quality items that should last a long time, and lastly because I’m naturally a pretty good saver and will have money in an account that I will use for unexpected repairs.
If you decide that it’s best that you invest in a home warranty, do your homework and investigate before you invest.
Please remember that the purpose of this podcast is simply to educate and inform. It is not a substitute for professional advice. The information that you hear is based the only on the opinions, research and experiences of my guests and myself. That information might be incomplete and it’s subject to change, so it may not apply to your project. In addition, building codes and requirements vary from region to region, so always consult a professional about specific recommendations for your home.
Thanks for stopping by. Hope you learned as much as I did.