As you go through the homebuying process, you learn new things about your house. Inspections reveal the good and the bad about your home, and you start thinking about what unknown costs might lie ahead — and how you can mitigate them.
It’s impossible to predict how your house will behave after you move in. The 20-year-old heating system might hold up for another five years, while your nearly-new refrigerator gives out a week after you move in. You can’t know until you’re in the home.
One way to hedge against unexpected costs is to take out a home warranty.
Home warranties are different from homeowners insurance. A home warranty policy covers repairs on appliances and major home systems that break down, which can be helpful in your first year of homeownership in particular. It gives you a chance to get to know the home and budget for long-term repairs without fronting some major expenses immediately after closing.
But what does a home warranty cover, exactly? And is it worth it?
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“A home warranty is peace of mind for a buyer that important, expensive items in their home will be repaired or replaced if they fail within the first year,” said Joy Aumann, a La Jolla, Calif.-based real estate agent.
Home warranties can be particularly reassuring in the current market. The demand for houses means buyers often offer above selling price on a home, and that they need to put in offers when they’ve spent little — if any — time in the house.
With so much pressure to move quickly on a sale, buyers may not have a chance to be as thorough in checking the home’s condition and verifying that all systems and appliances are functioning as they should.
“Buyers when they’re putting more money down trying to beat cash offers, when they’re getting a loan and cash-strapped, having that peace of mind that things like the heater or air conditioning and major mechanicals are being covered is really important,” Aumann said.
But home warranties benefit sellers as well, according to Aumann. These policies can protect sellers against property issues that come up after closing, as well as any disclosure mistakes.
A home warranty can help you save thousands of dollars in unexpected costs after moving into your home. That can be a substantial relief when you’ve recently put down thousands, or tens of thousands, of dollars in down payment and closing cost expenses.
“It hedges against the risk of you having to come out of pocket for your major mechanical systems in the home dying on you,” said Chase Scroggins, home selling and buying advisor at Tracy Cousineau Real Estate in Atlanta, GA.
However, it’s important to compare coverage options from different providers and understand exactly what’s included in your policy.
A warranty may cap the amount it will cover for a given repair, leaving you to pay any additional amounts. Policies will also differ in what systems and appliances are included.
Depending on your policy, home warranties may cover:
- Washer and dryer
- Air Conditioner
- Water Heater
- Septic System
- Pool Heaters and Pumps
- Ceiling Fans
- Garage Door Openers
- Garbage disposal
A home warranty is not a catch-all, and it is not as comprehensive as homeowners insurance. Your home warranty policy likely will not cover problems with the roof, foundational or structural defects, or issues such as water damage caused by a broken appliance.
The best way to think of a home warranty is that it will cover repairs or replacements for specific issues — your dishwasher breaks down, or your furnace stops working. But it doesn’t cover big picture work, such as replacing floors if a broken appliance causes a flood and there’s water damage throughout the home.
Anything structural will fall under your homeowners insurance policy.
Besides what it covers, the big question with home warranties is how much do they cost?
“On average, a 2,000-square-foot home is going to be about $500 to $600, then when you get up to large expensive square footage, $1,500 to $2,000 when you’re covering pools is not unheard of,” Aumann said. “If I’m doing a $3 million home, I’m going to ask for $1,500 coverage and ask the seller to pay up to that amount.”
Real estate experts agree the cost of home warranties can range from $400 to $800 per year for 2,000-to 3,000-square-foot homes and between $1,000 and $2,000 for luxury homes.
You’ll also pay a deductible, usually between $50-100, for each service visit covered under the home warranty.
You can buy a home warranty policy yourself, or you can ask your seller to cover it. In the current market, there’s less pressure on sellers to make such concessions since they may have multiple offers on their homes. If you’re in a competitive market, you may want to pay the home warranty yourself, rather than risk the seller opting for an offer that doesn’t ask for this policy.
But because a warranty can protect them as well, they may be willing to cover the cost, especially if it is a relatively small amount compared to what they stand to earn on the sale.
Asking for a home warranty after inspection
You can also ask for a home warranty after your offer has been accepted. We’re not talking about doing a bait-and-switch — but you may not know whether you need a home warranty until you’re well into your due diligence period. Your home inspector may recommend one based on the age of your appliances or something they observed during the home inspection.
Related reading: How To Buy a House in 11 Steps | 2021 Guide
Once you have more information about the home, you can ask the seller to pay for a one-year home warranty. They can refuse — but they can’t back out of the sale solely because you asked. At that point, you can decide whether to pay for the home warranty yourself.
Home warranties aren’t mandatory, but they can give you reassurance as you make one of the biggest financial decisions of your life.
“It’s kind of like insurance. If you want to make sure that for the price of the service charge, they’re going to get to the bottom of the issue and fix the problem, then [home warranties are] definitely worth it,” said Annie Kou, CEO and Broker of AK Luxury Properties in Los Angeles.
A home warranty policy typically has a one- or two-year term.
“What’s most common when I’m helping people buy or sell the home is that it’s all done at closing with one annual payment, and most companies have 12 months or 13 months for the home warranty,” Scroggins said. “Some companies will even offer two-year terms, which is great. If you’ve already bought your home and you’re wanting to get a home warranty for protection, you can do that, too.”
After your initial term is up, you can renew the policy. Some agents recommend this because it helps lower the risk of dealing with expensive repairs, such as HVAC fixes.
“You can get it any time so if you own a house, you could call up today and throw one on and pay for the year coverage upfront. We typically do it so that it’s paid for right before closing and escrow, and coverage starts immediately when the deal closes and lasts for a year… if you want to extend it, you just pay for another year,” Aumann said.
Keep in mind that if your seller covers the first year or two of the home warranty, you’ll need to cover the cost when it comes time to renew. You’ll need to decide at that point whether it’s worth keeping, or whether you feel you have enough money in savings to pay for any repairs that come up.
Whether a home warranty is worth it comes down to the home you’re buying and your comfort level.
If your home is newly built and has new appliances that are still under their manufacturer warranties, you might decide a home warranty isn’t necessary, Kou said. The likelihood of breakdows and mishaps is lower in a brand-new home.
“If it’s new construction, you’re already getting a builder warranty and many times they give you a two to 10 warranty for the mechanical systems so [a home warranty] would be overkill at that point,” Scroggins said.
This type of warranty covers major home systems for two years and structural defects for 10 years. Structural coverage may not be available on older homes, though.
If you are buying an older home, a home warranty may give you a financial buffer if you’re not sure how much longer the hot water heater will hold out or the appliances are several years old.
Sure, they might continue working for the foreseeable future. But they could also break down the day you move in — and a home warranty would cover the cost of getting them up and running again, rather than dipping into your savings.
“Other than new construction, I pretty much advise it for everybody,” Scroggins said.
|Peace of mind knowing repairs and replacements will be covered during your first year of homeownership||Costs several hundred dollars a year, on top of mandatory homeowners insurance|
|Covers many major appliances and home systems||There’s a deductible of $50 to $100 for every home service repair visit|
|Relatively affordable at $400 to $800 for 2,000-3,000-square-foot homes||If you have an emergency, you may not be able to get quick service; you may have to get approval from the home warranty company to contact another emergency service provider|
Home warranty FAQs
A home warranty helps cover the costs of repairing or replacing major appliances in your new home, as well as some repairs related to HVAC, plumbing, septic, and electrical systems.
Real estate experts suggest that homeowners purchasing an older home, particularly with appliances that are no longer under warranty, consider adding a home warranty. For a few hundred dollars a year, you could end up saving thousands in costly replacements and repairs.
The initial coverage period for a home warranty is usually one or two years. However, you can renew the policy after that; home warranties are not exclusive to newly purchased homes.
Unless you’re buying a newly constructed home, a home warranty could be a big money-saver. It might also reduce your stress and anxiety. Rather than worrying about how you’ll pay for repairs if something serious goes wrong while you’re rebuilding your savings, you can focus on enjoying the home and not worrying about money.