- What Are Home Warranties And Why Do They Save You Money?
- What is a home warranty plan?
- Size of the home warranty industry
- Home warranty for home sellers
- How does a home warranty work?
- Home Warranty vs. Home Insurance
- Home Warranty Coverage: What It Covers & Doesn’t Cover
- The home warranty buying process
- Why A Home Warranty Is Worth It
- Smart Money Home recommendations
What Are Home Warranties And Why Do They Save You Money?
Skip ahead to find out how a home warranty plan saves you over $500 each year.
You ever look around your house, or your credit card statements for that matter, and think to yourself “there’s a lot of expensive stuff in here?” If you haven’t, you should! All the systems and appliances that go into making your home comfortable add up to a lot of money, and unfortunately, unlike the land they sit on, they are depreciating in value from the moment you buy them. If only there was a cost-advantaged way to protect all of these items…
Something you may not be totally familiar with is a home warranty. In an effort to make sure you are aware of how a warranty can save you hundreds of dollars every year we’re going to cover the following:
- What a home warranty plan is
- The size of the home warranty
- Home warranties for people selling their homes
- How a home warranty works
- The difference between a home warranty and home insurance
- What is covered by a home service contract
- How to buy a home warranty plan
- Why a home warranty is a good financial decision
What is a home warranty plan?
A home warranty plan, also known as a home service contract, protects you against the normal wear and tear of the appliances and systems in your house and covers the costs of repairs or replacements, typically via annual contracts.
Size of the home warranty industry
The home service contract industry is growing in the U.S. (with a market size of around $2 billion) that can help keep your home appliances working and your household running smoothly. At that market size, it means that the industry is servicing roughly four million homes.
Home warranty for home sellers
One of the largest drivers of those four million homes is the use of warranties during real estate transactions. This is more common on the west coast, but warranties are a popular add on by home sellers to home buyers, so buyers know that any problems they encounter related to their systems and appliances in their first year of ownership will be covered.
How does a home warranty work?
When a homeowner buys a warranty contract, they are essentially asking the warranty provider to be their point of contact for any appliance or system trouble. Instead of calling a plumber, electrician, or repairman when something goes wrong, the homeowner can simply call their warranty provider. The provider then reaches out to their partner businesses to solve the problem for the homeowner.
Home Warranty vs. Home Insurance
You might be thinking, “How is this any different than homeowner’s insurance? Why would I need a warranty?” Home insurance will protect you from ACCIDENTS in your home, while a warranty will protect you from normal wear and tear. So, if you had a tree fall onto your condenser unit outside, your home insurance would be responsible for that, not your warranty company. But, if your air conditioner stops working on a summer day and needs repair, you would get that repaired by your warranty company.
When you think about the relative frequency of claims, you will likely be using your home warranty program SIGNIFICANTLY more.
Home Warranty Coverage: What It Covers & Doesn’t Cover
Warranty coverage is typically broken into two groups: systems and appliances.
- Air conditioning & ductwork
- Heating & ductwork
- Water heaters
- Garbage disposals
- Ceiling fans
- Smoke detectors
- Central vacuums
- Clothes washer
- Clothes dryer
- Range / Oven / Cooktops
- Trash compactors
- Garage door openers
- Some pool equipment
- Septic pump
- Well pump
In some instances, warranty companies will offer bonuses to customers like discounts on air filters. The warranty companies don’t want your equipment to break down, since that turns into an expense for them. So some warranty companies will offer discounts on air filters for your HVAC unit, which we have pointed out, goes a long way to keeping the system clean and preventing it from breaking down at an early age. This is positive for you and the warranty company.
Limits and Exclusions
Of course, there are always limits to your warranty coverage. For example, warranties only cover appliances that are in good working order when you sign the contract. Also, certain problems are only covered up to a point. American Home Shield, an industry leader, for instance, “will pay up to $3,000 per covered item malfunction for access, diagnosis, and repair/replacement of any covered appliance.”
If you’re thinking that sounds like a lot, it is. You will probably only encounter an issue if you are trying to replace the top of the line equipment, where you will be a little out of pocket. For instance, if you are trying to replace a $4,000 refrigerator, you will be out of pocket for $1,000 while the warranty will cover $3,000. Still very valuable, but doesn’t cover everything.
The home warranty buying process
Cost of a home warranty
Home warranty contracts cost as little as $350 and as much as $1,000 for all-encompassing plans, and the coverage period typically lasts one year. Of course, it is very easy to renew your coverage once the contract ends. You should also keep in mind that, while your home warranty does cover the cost of repairs or replacements, you typically must pay an additional $50 to $100 service fee when a contractor comes to work on your home.
Getting a home warranty quote
We have tried to make this easier for you by reviewing the major home warranty companies and facilitating you getting quotes. We cannot stress this enough, but the best thing you can do is to get multiple quotes. It is free to get quotes and consider what we said earlier about companies wanting lower customer acquisition costs. Warranty companies are much more interested in a hot/warm lead than a cold lead because they are cheaper. By showing enough interest to get a quote the warranty companies will likely try to win your business by offering even better discounts a few days to a week after you request the quote.
If you are looking to compare home warranty companies, we’ve got you covered.
Where you live matters
Factored into the quotes from the warranty companies is your zip code. What they are trying to do is determine how expensive the equipment in your home is, based on the averages in your area. This highlights the importance in getting a number of quotes as different companies may factor in different costs in your region.
How do you buy a warranty?
Once you have your quotes and have vetted the companies via our reviews and what the BBB says, then just pick the right price and company. Keep in mind, that just like home insurance, you can shop your policy every year. Be sure to understand every detail of your warranty contract, so you aren’t surprised when something breaks that doesn’t get covered. For example, a warranty might cover the repair of your refrigerator, but not of the icemaker in the fridge door! It is beneficial for both parties, you and the warranty company, to understand the ground rules to create a good relationship.
Waiting period or no waiting period?
The industry has largely adopted a 30-day waiting period, once you purchase your warranty. The companies do this to protect themselves if you have an issue that needs to be fixed immediately, like an $8,000 HVAC replacement. Warranty companies are in business to help you but don’t want to be taken advantage of.
Why A Home Warranty Is Worth It
Home experts have found that homeowners typically pay, on average, 1% – 4% of their home’s value every year in maintenance. That percentage is skewed higher as your home and the systems in your home age. On a $300,000 home, that suggests that at a minimum you should expect $3,000 worth of maintenance each year.
There will be some years with no costs, BUT there will be some years with massive costs, and you don’t want that to hurt you financially! Additionally, your warranty provider may have connections with the best repair servicemen in your area, giving you better service and better-working machines overall.
Keep in mind that all your systems and appliances have a finite life span and are depreciating a lot every year. With that said, let’s break down the math so you understand how much a warranty ends up saving you every year.
|Appliance||Useful Life (years)||Average Cost||Annual Depreciation Based on Average Life|
|Clothes Washer||5 – 15, avg 10||$750||$75|
|Refrigerator||9 – 13, avg 11||$2,000||$182|
|Garage Door Opener||10-15, avg 12.5||$350||$28|
Based on this we see that the expected annual depreciation expense on appliances is $571. Meaning you should be budgeting $571 each year to replace these appliances. Let’s take a look at systems.
|Systems||Useful Life (years)||Average Cost||Annual Depreciation Based on Average Life|
|Air Conditioner||7 – 15, avg 11||$1,500||$136|
|Furnace||15 – 25, avg 20||$4,000||$200|
|Ceiling Fan||5 – 10, avg 7.5||$300||$40|
|Doorbell||45||$100 (smart doorbell)||$2|
Based on these figures we see that the expected annual depreciation for your home’s systems is $592.
Putting it together
Note that both of our figures for appliances and systems exclude the cost of labor associated with a replacement which in some cases can more than double the cost! So ignoring labor costs, which by virtue of being mainly labor-based repair and replacement cost, ignores significant plumbing and electrical systems depreciation, at a MINIMUM, you should expect to budget $1,163 each year to replace these appliances and systems. Again, this number is much higher once you factor in labor costs and electrical and plumbing.
BUT, if we just compare the average cost of a home warranty program around $600 per year to the minimum $1,163 you should expect to pay out, a warranty is essentially giving you a 50% savings year in, year out.
Smart Money Home recommendations
- Check out our reviews and request 3 – 5 quotes from our top-rated companies.
- Consider creating a home inventory list of your systems and appliances, noting how old they are and when they were last serviced. This will be useful just so you have an idea when replacements will be coming up.
- Wait a few days to a couple of weeks from the time you get the quote to pulling the trigger on which warranty you want to go with. During that time they likely will be emailing you with discounts up to $125. This could drop a policy from $600 to $475, making it even more of an obvious choice against your annual depreciation expense.
Note: if you invest that $563 every year at an average of 8% per year for 45 years as a homeowner, you will have saved $217,000!!