Buying a home is usually an expensive proposition. The median price of a home in the U.S. is now $226,800, up 6.1 percent over the past year, according to Zillow, the online real estate marketplace.
As you consider how to protect your investment, don’t be tempted by television and online ads pitching home warranties, which promise to protect against calamities not covered by traditional homeowners insurance policies.
These warranties are actually service contracts that guarantee to pay the cost of repair or replacement if covered items, such as appliances, plumbing, and heating and air conditioning systems, stop working.
The Limitations of Home Warranties
Having a home warranty may provide you with some peace of mind. But you should realize that providers of these plans build in wiggle room that can make it easier for them to deny payouts. As a result, consumers often complain to the Better Business Bureau about home warranties because they didn’t get the benefits they expected, according to Katherine Hutt, a spokeswoman for the bureau.
A possible alternative to buying one of these plans is to self-insure. Consumer Reports has long recommended that consumers put the money they would otherwise spend on a home warranty or a service contract into a savings account dedicated to product repair and replacement. Or you could stash additional money for those costs in your general emergency fund. Either way, you won’t risk paying for a plan that may not provide the coverage you expect.
If you’re thinking of buying a home warranty, your first step should be to evaluate whether it covers what you want it to. There are plenty of limitations; these plans generally don’t cover nonmechanical items such as windows or the structure of your home, for instance.
Also keep in mind that if you’re purchasing a new home, the items inside are probably still covered by the manufacturer’s warranty and the builder’s warranty, says Edgar Dworsky, a consumer lawyer who runs the website Consumer World. You may have more reason to consider a home warranty if the home and the appliances are older.
5 Questions to Ask About Coverage
Before you buy a home warranty, consider how comfortable you are with the answers to these queries.
1. Do I already have protection? As noted above, new-home appliances may already be covered. Even if your appliances aren’t new, they may still be under warranty if you made the purchase with a credit card. That’s because some credit cards extend warranty length, Dworsky says. For example, many American Express cards add up to 24 months of coverage (to a manufacturer’s warranty of two to five years) on items you purchase with it.
2. How much will this warranty 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 home warranty: a plan for a particular appliance, a plan for all your appliances, or a plan for your appliances and your plumbing and electrical systems.
Prices may also vary depending on where you live. The American Home Shield website, for example, says a plan that covers most major appliances runs about $480 annually for a home in central Ohio; one that also includes the home’s electrical and plumbing systems costs close to $600.
By contrast, a homeowner in Westchester, N.Y., might pay $900 to cover major appliances and $1,020 to include electrical and plumbing.
In addition to the cost of the plan,there are probably going to be additional expenses. If you have a problem with an appliance or system, even one that’s covered, you’ll have to make a copayment when the contractor comes in to do the work. Those fees range from $60 to $125 depending on the work that needs to be done, according to the plans we examined.
3. Am I clear about what the warranty covers? Hutt says that most of the complaints that the BBB receives about home warranties stem from the fact that consumers don’t understand the coverage their plans provide.
The takeaway: Be sure to read the terms and conditions carefully. When we examined home warranty plans, we found that some policies will cover your refrigerator but not the icemaker that comes with it. Other policies may cover your hot-water heater but not the water tank itself.
Sometimes, if your appliance breaks under certain circumstances, it won’t be covered. An oven, for instance, may not be covered if it stops working while in self-clean mode or if it’s damaged by a power surge, according to the plans we looked at.
How you care for your appliances may also matter. If you failed to perform routine maintenance or if an appliance wasn’t properly installed, the home warranty provider could argue that it can refuse to pay for repairs. There could also be a pre-existing condition—even if it wasn’t evident to you when you bought the home warranty—that allows the provider to deny coverage of the item.
4. Will this plan repair or replace a broken item? Most home warranties explain that if a repair is considered too expensive, the provider might offer to replace the broken item instead. But in a situation like this, the home warranty company may give you only the depreciated value, requiring you to pay the difference out of pocket to get the same model you had before.
5. Are there limits on how much this plan will pay out? There are, but they depend on the kind of plan you purchase and the provider. Over a 12-month membership term, the plan from America’s 1st Choice Home Club, for example, pays up to $2,000 to access, diagnose, repair, or replace each covered item.