Home Warranties: Peace of Mind for a Price
by Dianne Molvig
Becoming a homeowner is exciting and, let's face it, a bit nerve-wracking. You've just plunked down a substantial sum of money for a down payment, and you're still getting used to those monthly mortgage payments.
You're also crossing your fingers that no expensive surprises spring up any time soon. Spending hundreds of dollars to repair a furnace or replace a water heater is the last thing you need right now.
The purpose of home warranties is to allay those kinds of new-homeowner jitters. But a home warranty may or may not be a wise choice for you. If you decide to buy one, scrutinize it carefully so you know what you're getting.
What is a home warranty?
Think of a home warranty as a cross between a service contract and an insurance policy on the major equipment and systems associated with a house. A warranty typically covers the replacement or repair of ductwork, central heating, interior plumbing, electrical systems, water heaters, and major built-in appliances such as dishwashers, ovens, and garbage disposals.
Policies vary. For instance, basic coverage also might include refrigerators, washers, dryers, air-conditioning systems, and garage door openers, or you might have to pay an additional fee for these. Likewise, you might pay extra to cover a swimming pool, spa equipment, or a private well.
Don't confuse a home warranty with a hazard insurance policy. The latter covers damage to your home and its contents stemming from a disaster, such as a fire or wind storm. A home warranty covers systems and appliances that suffer a natural demise after you buy your home.
It comes down to trade-offs--and a measure of guesswork.
Also, be aware of the difference between this type of home warranty and the warranty a builder provides on a newly constructed home. A builder's warranty, good for one year, covers such problems as foundation cracks or bad wiring. After the first year, coverage usually is limited to major structural defects that pose health or safety hazards.
The type of home warranty we're discussing here is for an existing house. You, the homeowner, can purchase such coverage for a home of any age. Or the person selling the house may buy a home warranty, in efforts to attract buyers. Sometimes buyers and sellers agree to split the cost of the warranty at closing.
Costs and benefits
A home warranty usually is good for one year from the house closing date. To keep it in effect longer, you must renew it annually. The first year's fee runs roughly $300 to $400, according to the Better Business Bureau, and renewal fees might be higher for successive years. But buying the warranty isn't your only cost. The homeowner also pays for each service call, usually in the $50-to-$100 range.
Is it worth it? It may be. Say the furnace dies within your first year in your home. Replacement costs easily could run $2,000 or more. With a warranty, all you'd pay is $50 to $100 for the service call, plus the cost of the warranty. On the other hand, the furnace may wait to succumb until four years later, after you've decided to let your warranty lapse. You'd be out of luck--and years' worth of fees for coverage you never had to use.
Coverage can vary significantly from one policy to another, so know exactly what you're getting for your money.
It comes down to trade-offs--and a measure of guesswork. You can't predict if and when you might need the coverage a home warranty provides. What are the odds you will? One statistic to consider is that homeowners with warranties average 1.7 to 2 claims per contract per year, according to the Home Warranty Association of California (HWAC)), a trade group for companies that sell home warranties.
Deciding if a home warranty is a smart purchase for you depends on several factors. How old are the major appliances and systems in the house you're buying? How well have these been maintained? If many of the appliances and systems are at the upper end of their typical life spans--say 10 to 15 years or more--a warranty may be a wise choice. Or you may decide to self-insure by socking away some money regularly in your credit union savings account to cover anticipated replacements and repairs.
If you're a seller, the decision to purchase a warranty relies largely on common practice in your area. In California, for example, about 90% of existing-home sales include home warranties, according to HWAC. In such a market, sellers may feel compelled to include a warranty to compete for buyers.
How to choose
If you think a home warranty makes sense for you, do some research before buying one.
Check out the company. How long has the company been in business? Is it licensed to sell insurance in your state? Your state insurance commissioner could tell you. Also, contact your state consumer protection agency or local Better Business Bureau to check on the company's reliability record. Call the company's customer service department with a few questions to get an advance glimpse of its helpfulness and courtesy levels.
Think of a home warranty as a cross between a service contract and an insurance policy on the major equipment and systems associated with a home.
Compare policies. Coverage can vary significantly from one policy to another, so know exactly what you're getting for your money. Keep in mind that home warranties typically exclude leaky roofs and other structural defects. They also don't cover removal of mold, asbestos, or other hazardous materials. Be sure you understand the contract and feel free to ask questions until you do. Are there dollar limits imposed on any types of repairs or replacements? Also, compare the charge per service call and the renewal fee after the first year.
Ask about the service contractors. Warranty companies typically have a list of service contractors they hire to do the work. Do these contractors have a solid reputation in your area? How near to you are they located? That may affect how quickly you get service. You might prefer to hire a service contractor of your choice. Some warranty policies allow that.
A final caution: The fact that a home includes a warranty does not mean you can skip the usual home inspection. Before you buy, always hire a professional home inspector to go through your prospective home from top to bottom. That may reveal significant problems a home warranty would not cover.
October 27, 2003
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