Home Warranty Coverage for New Homeowners
Owning a home is the American dream. Consider protecting your investment with a home warranty. Here's what you need to know to find the best coverage.
According to the U.S. Department of Housing and Urban Development (HUD), “For many Americans, owning a home is an essential part of the American dream that conveys a number of economic benefits…” Besides building wealth through equity, homeownership also means investing in a place you can improve and call your own.
One way to protect this important investment is by purchasing a home warranty, also known as a home service contract. If you’re unfamiliar with these, read on.
What Is a Home Warranty?
A home warranty is a service agreement, usually one year long and renewable, that offsets the cost of repairing or replacing a home’s major systems and appliances. Unlike homeowner’s insurance, which pays for losses from accidental damage such as fire or theft, a home warranty covers things that break or fail through normal wear and tear.
Think of a home warranty like the warranty on a new automobile. If a certain part of the car (engine, transmission, etc.) breaks or fails during the warranty period, the underwriter authorizes a registered local dealership to repair or replace the part at no cost to the owner. But if someone steals the car, your insurance kicks in.
Pro tip: Remember that a home warranty should always be a supplement to your homeowner’s insurance and not a substitute for it.
What Does a Home Warranty Cover?
A warranty plan (or contract) is usually divided into basic and optional categories. Warranties don’t normally cover foundations, walls, structure and finishes. Nor do they typically cover pre-existing conditions; items not listed on the contract; items damaged by unauthorized repairs; items improperly installed or modified; and failures from causes other than normal wear and tear.
Remember that plan coverage and cost varies greatly, depending on the size of your home and which region of the country you live in.
The three most common types of plans are:
- Combination (systems + appliance).
System plans cover things like:
- Duct work.
Appliance plans cover things like:
- Water heater;
- Air conditioner unit;
- Garbage disposal.
- Roofing system leaks;
- Garage door opener;
- Pool and spa equipment;
- Sprinkler system;
- Septic system;
Pro tip: Negotiate coverage based on your specific needs and budget. It never hurts to ask for what you want. What have you got to lose?
What to Look for in a Home Warranty Plan
Every home warranty plan has coverage limits and caps. When comparing home warranties, you’ll find one company may offer coverage in a total dollar amount per year, while another may only pay out a certain amount per appliance. Make sure to read the fine print to understand what’s covered, and — more importantly — what’s not.
Pro tip: Choose the broadest coverage you can afford.
Basic home warranties run between $350 to $1,200 a year, based on the plan and coverage. In most cases, you’ll pay a monthly or annual premium and a service fee. The service fee is paid to the warranty company or technician each time they dispatch a repair person to your home.
Industry service fees can range from $55 to $150, again depending on your plan.
Are Home Warranties Worth It?
Most people can expect to pay approximately one percent of a home’s original value for home repairs annually. If you purchased your home for $200,000, you can anticipate spending around $2,000 a year in upkeep. If your warranty’s annual premiums and a guesstimate of service fees fall below this amount, then buying a service contract could make a lot of sense.
On the other hand, if the premiums and service fees add up to more than one percent of your home’s purchase price, then you might be better off creating a savings account earmarked for future home repairs and maintenance.
And don’t forget to factor in the age of your home, the quality of your appliances and your do-it-yourself skills. If you’re handy around the house, you might forgo a home warranty and save money by doing the repairs yourself.
To learn more and find a home warranty provider in your area, go to the National Home Service Contract Association (NHSCA), a non-profit 501(c) (6) industry trade organization serving home service contract companies and consumer interests throughout the U.S.