Home insurance and home warranties, though similar, are two very different things. Find out how they’re different, and whether you need them.
When you’re buying a house, you’ll hear the terms ‘home insurance’ and ‘home warranty’ thrown around quite a bit. While they both sound similar, they’re two very different things that serve different purposes. Whether you need a home warranty, home insurance, or both ultimately depends on your home and your needs. This article touches on:
A home warranty, also known as a home service contract, is a policy from a private company that covers certain systems and appliances in your home. You pay a monthly or yearly fee to the company, and they cover the costs to repair or replace your appliances when they break down.
So, what exactly does a home service contract cover? “These contracts can protect your appliances, electrical wiring, plumbing, HVAC systems, and more from failures due to normal wear and tear—coverage that is not typically provided by a homeowner’s insurance policy,” says Tim Meenan, the executive director of the Service Contract Industry Council. Every company and policy has specific exclusions, but home service contracts usually cover the following:
If the above appliances or systems go haywire, your home warranty helps save the day. Assuming your damages aren’t excluded for whatever reason (more on that later), they’ll send a repair technician to assess the problem and either repair or replace the appliance/system.
A home warranty helps pay for stuff that breaks in your house, which is what home insurance does, right? Sort of.
Home service contracts cover faults and regular wear and tear to appliances and systems. That’s it. They don’t cover your other belongings, your home’s structure, or your liability. Those are covered by home insurance.
Be aware that home insurance generally does not cover normal wear and tear. If one of your appliances simply stops working, home insurance probably won’t pay to repair or replace it. That’s what a home warranty covers.
There are some situations where your home insurance will cover damages to appliances and systems that might otherwise fall under your home warranty. Here’s an example: the heating component in your dryer suddenly stops working. You can file a claim with your home warranty company, and they’ll send a licensed technician to diagnose and fix it. But if your house catches on fire, and your dryer is destroyed, that’s covered by home insurance, not your home warranty.
Short answer: you definitely need home insurance. But you may or may not need a home warranty.
Unlike car insurance, you’re not legally required to have home insurance. If you need a mortgage to buy your house, however, your lender will require that you insure your home.
Even if it’s not required by law or your lender, you should 100 percent buy home insurance. Home insurance covers a wide scope of potential problems: your home’s structure, your belongings, and your liability. If your house is leveled by a natural disaster, homeowners insurance pays to rebuild it. For most people, a home is their biggest asset. That’s why insuring it is so important.
However, the stakes aren’t so high when it comes to a home warranty. It doesn’t cover the house itself – just the appliances inside. So, do you need one? You might want to buy a home warranty if:
It’s a reality that, at some point in your homeownership, you’re going to end up spending some money to repair or even replace your appliances. And it probably won’t be cheap. “A recent national survey found that 62 percent of respondents said they’d spent money replacing or repairing broken home appliances in 2016,” says Meenan. “Of these, more than a third reported spending $300 or more doing so.”
That’s why having a home insurance policy and a home warranty (if you can afford it) is so helpful. “Homeowners should have both, if they have room in their budget. Between the two policies, almost anything that happens to the home will be covered,” says State Farm agent Jim Krause. “I have personally used my home warranty when the fan went out on our AC unit. I paid $75 out of pocket for what could have been a $300 fix.”
Home insurance can work together with a home warranty. “If your AC condensate line breaks, the warranty could cover fixing the line, but your homeowners insurance could cover the water damage from the condensate leaking,” explains Michael Marlow, owner of Veteran Home Inspections.
If you’re leaning towards buying a home warranty, you still have some policy homework to do. Home warranties come with plenty of exclusions and technicalities, so be sure to read the fine print. Ask these questions about any prospective policy:
The price of your home warranty depends mostly on the extent of your coverage and the number of appliances you want to cover.
The worst thing you can do with a home warranty is assume something is covered when, in reality, it isn’t. Learn about any coverage exclusions before you buy your policy. “This is where most warranties fail consumers, since they like to claim that everything that breaks is a pre-existing condition,” warns Marlow.
Home warranty companies usually charge you a fee when you need repair work. It’s usually called a deductible or a service fee. Find out how much it is so you can plan accordingly. Most home warranty plans come with a $75 service fee, though some companies charge up to $125.
When something breaks, how do you get it fixed? Most warranty companies send a technician to your house to diagnose your problem. Make sure your home warranty company is sending licensed repair personnel who know what they’re doing.
Some companies may require you to arrange the service call yourself, after which they’ll reimburse you. If you can, choose a company that has their own network of contractors. It’s convenient and generally cheaper, because the home warranty company can negotiate bulk repair rates.
There are two main approaches when your appliance is unrepairable: brand for brand or builder's standard. With brand for brand, your damaged appliance is swapped out a similar or equal model. With builder's standard, your appliance is replaced by a ‘standard’ version of your appliance.
If you have high-end appliances, make sure your policy includes brand for brand replacement coverage. if you don't, you may be able to pay the difference between the builder’s standard and the brand for brand appliance. Otherwise, you’ll end up with substandard appliances.
According to Realtor, a basic home warranty plan starts at about $300 per year. If you want better coverage, expect to pay $600 a year. On top of that annual fee, you’ll need to pay a service fee every time you need repair work done. As mentioned earlier, that fee is usually $75.
Should you buy a home warranty? It’s the million-dollar question. Actually, in the case of a home warranty, it’s more of a $300 to $600 a year question.
Unfortunately, there’s no one size fits all answer to this question. It depends entirely on you, your house, and your needs.
As a general rule of thumb, if you have a brand-new house or appliances, you’re less likely to need a home warranty. New appliances have lower chances of malfunctioning in their first few years. And if they do, they’re often covered by the manufacturer’s warranty.
Even if you own an old house with old appliances, a home warranty isn’t a slam dunk. Many home warranty companies have appliance age restrictions. Before you can file a claim, you might have to show maintenance records to ensure that your appliances had proper upkeep.
Like insurance, a home warranty only seems worth the money when you really need it. You can’t pick and choose when that time comes. If you pay for the warranty but rarely use it, you might not feel like you got your money's worth.
Angie’s List covered this in their article, ‘Why Home Warranties Are No Guarantee.’ One unsatisfied customer explains: “I’ve paid $4,000 [for a home warranty] over the years, including $50 for every service call. I would have been better off putting that money in a savings account,” On the other hand, another home warranty customer says she used her home warranty “10 times in the past five years for repairs to her washer, dryer, refrigerator, freezer, microwave and clogged drains.”
Let's do the math. Assume you pay $500 per year for a home warranty with a $75 service fee. According to Angie’s List, “typical electrical kitchen appliance repair work costs $1,000 to $2,000. Electricians and appliance repair firms charge between $45 to $120 per hour for repairs. Expect a service charge as well, which can range between $150 to $200 per visit.”
By those numbers, if you have one faulty kitchen appliance every other year, a warranty will save you money. That’s especially true on a major appliance like an HVAC. If your HVAC’s condenser coil needs to be replaced, for example, you’re looking at a bill between $1,900 to $2,900. That repair bill would pay for several years of home warranty coverage.
However, it‘s entirely possible that you don‘t use your home warranty for several years. And when you finally need to use it, the warranty company could try to claim your repairs are excluded, or only partially covered, or not covered due to owner negligence, or any number of things. That’s why, if you do buy a home warranty, it’s so important to go with a trustworthy company with a strong reputation.
At the end of the day, a home warranty can help you rest easy. “Home service contracts are an investment in peace of mind, knowing that if something breaks or malfunctions, you won’t face a staggering repair bill,” says Meenan. “Even better — a lot of home service contracts are transferable, and therefore can increase the value of your home if you’re selling or considering it in the near future.”
That’s right -- even if you don’t end up using your home warranty for repairs, they come with another benefit: increasing your house’s value. A home warranty helps a potential buyer feel secure about their investment.
A study by American Home Shield found that a home warranty increases a home’s sale prices and reduces its time on the market. The study states that a house with a home warranty spent 16 percent less time on the market compared to a house without a home warranty. On top of that, homes with warranties sold for an extra $2,300 on average.
Your ideal home warranty company depends on your needs. Do you want the best possible service? Or a large network of contractors? Or are you looking for the cheapest policy? Different companies have different strengths (and weaknesses).
Ask your neighbors, family, and friends if they have a home warranty. If they do, ask about their satisfaction with the company. You can also ask the realtor who sold you your house. They are usually quite familiar with the home warranty companies offering policies in your area.
In no particular order, these home warranty companies consistently score well in customer satisfaction surveys and reviews:
Ready for a helpful home warranty money-saving tip? Don’t file a service claim for a single minor repair. Bundle them together. If you have several plumbing issues, you can get them all fixed (assuming they’re covered) for a single service fee. You can knock out a leaky sink, runny toilet, and a slow-draining shower all at once.
Just make sure you tell your account rep about every problem when placing a service call. If it’s not documented, the contractor won’t have authority to repair it. Unfortunately, you can’t simply tell them about it once they get there. Get it in writing and save money.
A: They’re two completely separate policies and they cover different things. Home insurance covers your house’s structure, belongings, and liability from unexpected accidents and natural disasters. A home warranty covers wear and tear and malfunctions on your home’s appliances and systems.
If you own a home, you should have home insurance. But whether you need a home warranty isn’t so clear. Some homeowners love their warranty because it can save them money on repairs, bring them peace of mind, and eliminate the stress of finding qualified repair personnel. Other homeowners go years without using their home warranty, and when they do, they’re unsatisfied by surprise exclusions or unqualified maintenance personnel.
Whether a home warranty is right for you ultimately depends on you, your house, and your needs. Are you averse to DIY repairs? Do you not have a qualified contractor on speed dial who can help you with maintenance? Are you frustrated by faulty home appliances? If so, you might want to buy a home warranty.
A: While a home warranty is technically a form of insurance, it doesn’t count as home insurance. If your mortgage company requires proof of insurance, a home warranty won’t cut it.
A: Like insurance, a home warranty only seems worth it if and when you have to use it. It’s possible that you pay for a home warranty for multiple years but never need to use it. Or, when an appliance does need some maintenance, your home warranty might not cover it.
In those cases, homeowners probably won’t feel like they’re getting their money’s worth. But other people get a lot more out of their home warranty. They’re able to save money on regular maintenance with their warranty. It ultimately depends on the extent of your warranty’s coverage and your appliance luck.
With a price tag ranging between $300 to $600 a year, home warranties aren’t prohibitively expensive. And when you consider the high cost of a minor kitchen appliance repair (about $170) or new appliances (between $350 to $8,000), the value of a home warranty is quickly apparent. It all depends on if you need to use it.
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