When you negotiate to purchase a home, the seller may offer you the ability to purchase a limited, temporary warranty on a particular home. In some cases, the seller may even provide one with the sale of the home.
While home warranties can be useful in certain situations, you should also understand what they cover and how they differ from homeowner's insurance should you buy one.
What is Covered in a Home Warranty?
Home warranties vary in the coverage offered, but there are some common features you can reasonably expect. A standard home warranty often covers the plumbing systems and some related appliances (e.g. dishwasher and water heater), ventilation and the heating and cooling systems.
You may need to request additional coverage for appliances that are replaced frequently or considered optional, such as a refrigerator, washer and dryer or air conditioner. You may be able to opt to cover unusual features, like a swimming pool, spa or septic system, as part of the policy. The warranty usually covers only a portion of the expenses required to repair or replace, and may not include professional service fees.
How Do I Use a Home Warranty?
In exchange for a premium, which can vary from state to state but is usually a few hundred dollars a year, and a nominal fee for each time you request service, the home warranty should in most cases cover necessary repairs for the term of the warranty. As with everything related to your home purchase, you must carefully read the fine print on your home warranty before you consider buying it.
Note that most home warranties have a clause that prevents you from filing claims based on pre-existing damage or problems that existing in the home prior to getting the home warranty. This clause may require you to show proof of a home inspection in order to file a claim. Since many home inspections only look at the structure and some systems of the home, you may need to request home inspections for other systems, such as HVAC or appliances, before you buy the home.
What Distinguishes a Home Warranty and Homeowners Insurance?
Although the items and systems covered by a home warranty are very similar to those covered by homeowners insurance, these two forms of protection have distinct purposes. A home warranty is designed to minimize your additional investment to repair or replace equipment that stops working through normal use.
Homeowners insurance protects you in the event of unexpected and irregular occurrences, such as fire, theft and or some types of flooding. Neither a home warranty nor homeowners insurance should be considered an effective replacement for the other.
Is a Home Warranty a Good Investment?
Ultimately, you should use some common sense and possibly the professional opinion of an advisor or your real estate agent to determine whether a home warranty is the right choice for you. A lot of home buyers find themselves without a lot of liquid assets after purchasing a home. If you deplete your emergency fund making the down payment and closing costs, you may not have a lot of money on hand to fix the furnace you did not expect to break down three months after you moved in.
In cases like this, a home warranty may be a wise option to consider. However, if you regularly maintain a moderate savings account for emergency repairs, a home warranty might not be worth the cost
How to Shop for a Home Warranty
Calling around is the best way to find a home warranty that's right for you. When comparing multiple home warranty companies to each other, find out:
- How much the policy will cost
- What the deductible is
- What's covered under the contract
- What isn't covered
Many home warranty companies pick and choose different appliances to cover, so pay attention to the differences in coverage. Cost isn't everything. If a home warranty doesn't cover many of the important appliances that you use, then that home warranty may not be worthwhile.
When investigating home warranty companies, ask questions like how they choose the contractors to send to your home, and what happens if an appliance can't be repaired. If the warranty pays to replace the appliance, find out if the home warranty company will choose a bottom-of-the-line model, or if the company chooses a model that is comparable to the model you already own. Asking these questions can help you pick a home warranty company that's right for you.
Additionally, home warranties may not be necessary in a new construction or recently newly constructed home. Often, builders will continue their own warranties to new owners. Be sure and check with your real estate agent on the possibility of assuming existing builder warranties.
There are a lot of costs related to buying a home that you might not expect, including paying for repairs of equipment after you move in. Some people get a lot of benefit from home warranties, while others find them an unnecessary expense. By ensuring that you have adequate methods to pay for the upkeep of your new home, you can simplify the home buying process while making a good investment.
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