Home Warranties and Your Financial Plan
As a CERTIFIED FINANCIAL PLANNER™, I understand that some purchases we make are life-changing. These are purchases that we dream about making for a long time and save up for over several years. Generally, when we think about purchases like these, two main things come to mind - our vehicles and our homes. These are some of the most significant investments we make, and it only makes sense that we want to protect them and keep them functional, safe, and like-new for as long as possible!
Being the excellent Financial Planner that I am (wink, wink), I put together a blog post a few weeks ago that goes very in-depth about auto warranties, All About Car Warranties. In that article, we covered everything from what's covered by different types of auto warranties to auto warranty scams. So this week, I'm going to be revisiting the topic of warranties. Still, instead of car warranties, we'll be covering home warranties.
Home Warranties - The Basics
To most, what a home warranty is likely isn't a mystery; however, I think it's still fruitful to start with the bare basics. Similar to a car warranty, a home warranty is an additional policy you may purchase and pay for over time that covers various parts and appliances in the home. Typically these are the more expensive aspects of a home, which are permanently or semi-permanently affixed to the house.
What's likely more alluring is how home warranties actually work. Without getting too far into the weeds just yet, you apply for a home warranty; once accepted, you call or contact your home warranty provider when something covered under the warranty breaks, the home warranty provider contacts (usually a third-party) who will come and repair or replace the faulty appliance, and the homeowner pays a small fee for the fix/appointment.
What a Home Warranty can be used for
Like many things, not all home warranties are the same. Different home warranties cover various aspects of the home and appliances. This should be well outlined for you when you're completing the home warranty application process, and I recommend keeping and filing a record of what's covered and not covered. However, there are common aspects of the home that are commonly covered by most home warranties.
According to The Balance, Air Conditioning, Kitchen Appliances, Washers and Dryers, Doorbells, Heating, Water Heaters, Ductwork, Garbage Disposals, Inside Plumbing, Ceiling Fans, Electrical Systems, and Ovens are commonly covered by most home warranties. However, according to the same article, things like sprinklers, faucets, spas, pools, and items broken before house closing may not be covered.
While it's far from a steadfast rule, you can typically expect larger, expensive everyday appliances to be covered. However, like I previously said, it's essential to know your coverage before your sign up for a home warranty and keep a copy of what is and isn't covered by your warranty in your records.
Do You NEED a Home Warranty?
It can be confusing to many who are first discovering home warranties whether or not you need one. And I'd say that really depends on how you define a need. There's nothing set in stone saying that you absolutely must have a home warranty as far as the law goes. But unfortunately, this is often confused because of the name similarity to homeowners insurance, which is required by law.
A case could be made that it's wise to have a home warranty if you define need a lot more loosely; however, the case can also be made against having a home warranty. The critical thing to remember is because home warranties are non-standardized and optional, their quality and effectiveness can differ from state to state and business to business. Because of this, it's essential to make sure you're dealing with a reputable home warranty company. I'd recommend working with your financial planner or Certified Financial Planner to find a great home warranty that covers what you need it to.
Are Home Warranties Worth It?
The problem with telling whether or not a home warranty is worth it is the same with all investments. We're humans who aren't omnipotent and can't peek into the future. Because of this, it's hard to tell whether or not you'll get your money's worth out of your home warranty because we don't know if our expensive home appliances will break or not. However, we can peek into the past, which is helpful!
According to Investopedia, "One major problem with a home warranty is that it will not cover items that have not been properly maintained." This can pose an issue with home warranties to those who've purchased used homes which have been long-maintained (or not maintained) by the previous owner. Chances are, if all of your appliances are on the older side, you'll have less protection and utility with a home warranty. However, that doesn't make it useless because you're also likely going to need repairs and replacements sooner than those with newer appliances. The fact also remains it's cheaper to replace and repair with a home warranty than it is without one - as long as your appliances have been appropriately maintained.
How Much do Home Warranties Cost?
As I've stated throughout this article, home warranties are non-standardized, and each is different. How much a warranty costs depends on factors like your state, the company you're working with, and the specific policy you get. Another thing to consider is that there's no blanket cost for a home warranty. Instead, they're broken down into monthly premiums and service fees. A monthly premium is how much you pay each month to retain the policy. A service fee is how much it costs to have someone come to your home and repair/replace your broken appliance.
However, ThisOldHouse compared several home warranty prices from different companies. They found that, in general, the average cost of monthly premiums is around $25 to $50 (or $300 to $600 annually). In addition, the average price of service fees is somewhere around $75 to $125 per visit.
Home Warranty Limitations
Though we've touched on this throughout the article, it's just as important to know what your policy doesn't cover as it is to understand what it does cover. Outlining this information before you ever sign the dotted line can save you a ton of heartbreak down the road when appliances start needing to be fixed.
Precisely what a warranty does and doesn't cover is warranty-specific. Still, some items that may not be covered (reiterating what we talked about earlier) are sprinklers, faucets, fridges, washers, dryers, garage doors/openers, spas, pools, and broken items. Warranties may also be limited in covering things that haven't been maintained correctly, items damaged before home closure, violations of code, and items that haven't been installed correctly (or have been installed by you). Things like improper maintenance and incorrect installation should be outlined by your coverage and are defined by the companies that provide you the home warranty. This is important because it may put the consumer at a disadvantage, especially working with less reputable companies.
Where to Get a Home Warranty
You could get a home warranty by directly contacting a company you want to work with. However, many financial planners and financial professionals would advise against this. Warranties are notorious for scammy and non-reputable companies alluring individuals (homeowners and car owners) to sign up for coverage that turns out to be worthless down the road. Unfortunately, this puts a bad taste in many people's mouths when it comes to the topic of a home or auto warranty. However, the actions of some of the companies totally overshadow the excellent work that other companies do.
Because of all of that, my best advice for those seeking out a good home warranty (or car warranty) that's actually worth its weight is to get in contact with your financial planner or financial advisor. We work closely with people who have all sorts of experiences with warranty companies day-in and day-out. As a result, we know all of the rumors, bad experiences, and good experiences our diverse set of clients have had with different companies, which makes us great confidants to lean on when searching for a warranty.
Are you interested in learning more about home warranties? If you'd like help or advice about finding excellent home warranty policies, please call or email to schedule an appointment with me. I'll work with you to create a financial plan that's optimized for you.
Until next time...this is Melissa Making Cents!
Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is also a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.