What Is a Home Warranty And When Should I Buy One?

By Brandon Cornett
© 2011 All rights reserved

As a home buyer, there's a chance you could go through the entire process without hearing about home warranties and warranty coverage. But the topic may come up at some point, especially if you live in a state where these warranties are popular (such as California). So in this article, we are going to talk about the basic concepts of the home warranty and what you, as a buyer, should know about them.

Home warranties are typically used with existing homes, as opposed to new construction. If you have a new house built, the builder will probably include a warranty of some kind -- at least for the first year or so. But this kind of builder protection obviously doesn't apply to an existing home. And that is where home warranty plans come into the picture.

This type of protection covers things that a typical home insurance policy does not. These warranties generally cover things like broken furnaces, plumbing problems, failed appliances, etc. Homeowners insurance, on the other hand, covers your house and belongings from different types of hazards, such as fire and storm damage.

Who Pays for Home Warranty Coverage?

As with any other type of insurance, home warranties can be purchased by anybody. In some cases, the seller will buy a one year warranty in order to entice buyers. This is very common in California, for example. In that state, almost all sales of existing homes include a home warranty plan of some kind. This is good news for the buyer, as it gives them additional coverage over the installed systems within the house (and they typically don't have to pay for it out of pocket).

Are These Warranties Necessary?

Now we are getting to the heart of the matter. If you buy an existing home, and the seller has included a home warranty within the purchase price, then consider it an added benefit.

But what if there are no warranties currently in place? Do you need to buy one? And if so, what kind of coverage can you expect? This is something a lot of financial experts and consumer advisers disagree on. Some point out that home warranties are a wise investment, especially with older homes that are more likely to have electrical, mechanical or plumbing problems. But just as many experts (if not more) believe that home warranties are a waste of money.

So like anything else, it really depends on whom you ask. It also depends on the policy itself, and how the coverage works.

The typical home warranty requires an annual fee of some kind. These fees will vary depending on the company and coverage that's included, but they usually add up to several hundred dollars per year. In theory, this cost would give you warranty coverage for repair and/or replacement of the various systems within your house -- heating, plumbing, major appliances, etc. Other items can be added on for additional policy fees, and this may include a swimming pool or even the roof.

If you have some kind of damage on an item that's covered in your policy, and the repair cost does not exceed the amount stated in your policy, you might only have to pay for the service visit. If the cost of repairs is greater than the amount stated in your policy, you'll have to pay out of pocket. In this regard, home warranties are just like any other form of insurance coverage.

Shop Around and Read Your Policy

When researching this topic, I spent a lot of time reviewing customer complaints about home warranty plans and companies that sold them. One of the most common complaints came from homeowners who thought a certain item was covered, when in reality it was not. This is why you should read the fine print within the policy, to make sure you understand where the coverage starts and ends.

For example, consider the plumbing within your house. Most home warranty plans only cover plumbing problems that are within the structure of your house (above the foundation). Under such a plan, ruptures or other damages that occur within the foundation or elsewhere underground would not be covered by the policy. This is just one example of how the coverage can start and stop in a certain way. The same applies for all of the other systems that are covered under your home warranty plan.

You should also spend some time researching the company offering the warranty. Home warranties are like any other industry, in the sense that there are good companies and bad ones. Some of them provide a good service at a reasonable cost, while others border on white-collar crime.

I recommend taking three specific steps to research a warranty company. You should check their Better Business Bureau record, do a Google search for their company name, and check for any complaints filed against them within your state. All of these things can be done online.

Conclusion

Home warranties are often tied to the sale of an existing home. Thus, the buyer gets the warranty coverage without having to pay for it out of pocket. In some cases, a new homeowner will choose to extend the warranty by renewing the policy. There are good warranties and bad ones, so you need to do plenty of research into the company and the policy itself. Make sure you know what kind of coverage you're getting, as well as what's not covered by the policy.