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Are Home Warranties Really Worth It?

When buying a home, there is a whole slew of new terms to learn. One of these is “home warranty”. During the process, the realtor, the seller, friends and letters in the mail will be bombarding you with information about it. Needless to say, there are a lot of people who have a financial stake in every new warranty purchased, so every homeowner should be informed before the sales pitch comes.

What Is a Home Warranty?

A home warranty is a contract with a company to replace certain things and systems in a home when they break or malfunction. HVAC systems, pools, high end appliances, furnaces, plumbing and so on can all be covered by a home warranty. This is different from homeowner’s insurance, which covers disasters – this is for normal wear and tear.

When a claim is filed, the company will send out a technician to evaluate the item or system to determine the legitimacy of the claim, and if all is well, the system or item is repaired or replaced. This is of course paid for with monthly premiums and, in many cases, a technician fee for each claim. Oftentimes it is bundled into the initial sale, sometimes used as a way for the seller to sweeten the deal.

What Are the Advantages?

The advantage of a home warranty is obvious. Having peace of mind over the most expensive things in the house is nothing to dismiss lightly. The owner knows where to go and who to call when something goes wrong. And often the warranty is included in the sale of the house. And best of all, if something like the electrical system or that really expensive refrigerator goes out, it has already been paid for.

What Are the Drawbacks?

What must be evaluated with a home warranty is the ratio between cost and value. If nothing under the warranty breaks for a long time, then that money (usually hundreds of dollars per year) is going nowhere. Most homes are already insured against cataclysmic problems, and warranties from builders and contractors, or manufacturers of high-end items will often cover the most worrisome points.

Then of course there is the reality of shady companies not wanting to hold up their end of the deal. Some companies are notorious for flagging legitimate claims as “improperly maintained” and walking away. And even if a new stove is brought in, the company decides which one, not the policyholder. Many of these problems could be solved with a disciplined emergency fund, or with a policy handcrafted to cover the most problematic areas without drawing too much into the net and jacking up the price.