Home Warranties:
Paying for Peace of Mind

Today more and more consumers are looking at the advantages of buying a home warranty.  If you are among them, here are a few things to add to your knowledge base as you decide whether a warranty is right for your real estate scenario.
An Overview
A home warranty combines characteristics of an insurance policy and a service contract.  It covers repair and replacement costs for major household systems and appliances that break down due to normal wear and tear.  Components that are covered depend on your specific contract but typically include plumbing, heating, and cooling systems as well as appliances like dishwashers, ovens, and refrigerators.  You choose what items you want included and pay for that level of coverage.  You may find that a standard or basic policy covers everything you need.  If not, you can pay an additional fee for extra coverage.

Home warranties only cover systems and appliances that are in good working order before coverage begins.  They are also designed to cover existing or pre-owned homes and can be different from a builder's warranty that typically comes with a newly constructed house.  Also, be careful not to confuse a home warranty with a homeowner's insurance policy.  Homeowner's insurance protects against scenarios like fire and natural disasters and helps replace what was lost or damaged.  Home warranties repair or replace covered items that fail due to normal usage.

The typical home warranty is effective for one year and comes with an option to renew.  Costs vary with coverage level, location, and contract period and can range anywhere from $250 to $600.

How It Works
When a covered item breaks down, the homeowner contacts the warranty company directly.  They arrange for the appropriate service person to come to the home to diagnose the problem and complete the needed repairs or replacement.  The warranty company contracts and pays local repair companies.  The homeowner pays a service call fee -- typically from $25-$50 for each visit.

Benefits for Buyers
Having a home warranty can provide an extra level of comfort with a newly purchased home, especially if it has older mechanical systems and appliances.  Spending hundreds, even thousands, of dollars to repair an unexpected major problem may be the last thing that any buyer needs.  A warranty can help allay fears about expensive surprises.  And if a costly repair actually occurs, the warranty can result in savings.  In addition, a home warranty offers convenience.  It is like one-stop shopping.  One call to the warranty company replaces searching through a laundry list of different repair companies to find a service technician.

Benefits for Sellers
When buyers know that a home is covered by a warranty, their level of comfort and confidence with the property goes up.  This can result in advantages for sellers.  For instance, if a buyer is choosing between two homes that are basically identical, the home with the warranty is highly likely to win out.  Also, peace of mind can reduce the buyer's need to seek price concessions that would normally be associated with making sure they have enough money to cover any unanticipated problems.  This can mean a higher selling price.  And a home warranty can decrease after-sale liability.  If something fails down the road, the buyer can have the warranty company handle it rather than seek out the seller to pay for what is claimed to be a defect that was hidden during the sale.

Choosing a Warranty
If you think a home warranty might make sense for you, remember that not all home warranty companies and policies are the same.  At a minimum, you should:

  • Shop around.  Check out several warranty companies.  Find out as much as you can about their business practices and reputation.

  • Understand coverage level. Because coverage varies widely, ask questions about what your policy will and will not cover.  Also, get clarity about extra coverage and additional fees.

  • Ask about procedures.  How do you initiate a service call?  How much does each service visit cost you?  Is there a dollar limit on repairs or replacement for certain items?

To find a warranty company, ask friends or family for referrals, consult your local Yellow Pages Directory, or ask an area real estate professional.  And then do your homework to determine which policy will best enhance your home sale, purchase, or ongoing ownership.

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.