Home Warranties versus Home Insurance - What is the difference?
One of the more stressful aspects of buying or selling a home is the uncertainty that both buyers and sellers face regarding the decision itself. In each instance, there is risk and liability. While there is no real way to overcome the risks involved in purchasing a home, it is worthwhile to understand and consider the value of a home warranty, especially during the period of listing or buying a home. Both buyers and sellers should research home warranties to understand how they work, what is covered, and the limitations of a warranty.
Home warranties are not homeowners insurance. Homeowner’s insurance covers the house itself, usually against fire, theft, vandalism, windstorms, natural disasters (with extended coverage for floods/hurricanes, etc.), accidental damage, or injuries. The job of this type of insurance is to protect your investment and your liability. But homeowner’s insurance rarely covers the home’s mechanical systems, leaving you vulnerable to the inconvenience and costs associated with breakdowns of these systems. This is where a warranty can come in.
In some states, new homes are required to have a home warranty offered by the builder. These differ from other home warranties in that they might have a longer duration, from one to five years, and they may be renewed by the homeowner. Usually these home warranties are much more robust in their coverage, but again, it is worthwhile to do the research and go in with your eyes open, knowing what is covered and what will be the responsibility of the homeowner. Buying a new home from a reputable builder may be more valuable than having a warranty, which might never be needed in a new home.
Home warranties purchased for older homes vary widely. These home warranties are more likely to be used, and should be considered a form of insurance designed to offer peace of mind to the homeowner when looking at the cost of repairs not normally covered under other insurance. Home warranties may be purchased for specific periods, for example, the duration of a listing of a home, or for longer periods of time.
Buyers benefit from a home warranty because they offer the assurance that repairs to mechanical systems in the home will be covered with only a small out of pocket expense.
Sellers benefit from them because they make the home more attractive to buyers and they are “off the hook” if a large repair is needed. For this purpose, a home warranty might indeed offer just that – peace of mind, and a message that everyone wants this deal to go through.
Here are things to be on the lookout for: Home warranties that are bought by the seller for the term of the listing expire upon the sale of the home, tend to cover fewer systems (often only heating/cooling, some plumbing and electrical). The advantage of these warranties are that if a problem is spotted during the inspection, and that system is covered by the warranty, then the seller can seek to have the problem fixed under the warranty, rather than have to cover the entire cost. A positive factor is that this type of warranty tends to cost less money up front.
Some home warranty policies are transferable and provide coverage up to a year, or a new policy may be offered by the seller to the buyer for the duration of one year after the sale. Buyers should ask about the nature of the warranty, and sellers should do the research to know what they are buying. When purchasing a home warranty there are a variety of options including duration of the plan and what systems are covered.
Comprehensive plans are more expensive than those that cover only the heating and cooling systems, plumbing and electrical. Hot tubs, pools, and other more elaborate systems or appliances may or may not be covered, so check carefully. Whether or not the appliance is built into the home may also be a key factor.
Generally, these warranties cost $300-$400+ a year, and the current owner of the home would pay a service fee of $50-$75 for a service call. Some companies require the use of certain service providers and will even schedule the calls; others provide a list of providers from which to work. In areas where there are many providers, service might happen in a timely fashion. In more rural areas you may be facing longer wait-times for a service call. When researching the warranty, ask questions about how to schedule service calls and the wait-times in your area.
Getting a home warranty is easy – most companies are willing to take your money after you fill out an online application, without a home inspection. Companies offer many different levels of coverage, with regard to duration and what is covered. The more comprehensive the coverage, the larger the initial cost. Some companies will advertise “no waiting period” and others advertise “no service fee” – but with each company there is research to do. After all, if home warranties were all great, or essential, everyone would have them.
Beware of the “hard sell” – most companies direct the consumer to a page online where they will have a representative contact you with an estimate. Before offering your contact information, it may be beneficial to research each company online to find out more about the service plan details prior to a sales person contacting you. You will be more in control of your shopping experience, and less pressured to make a decision.
Problems around home warranties usually arise when there is a dispute around coverage or there is a disagreement as to whether the system has been adequately maintained by the homeowner.
Clauses in the contracts often state that systems must not have been “misused, abused, or poorly maintained” and that the issue can’t be a “pre-existing” condition. Many contracts include a 30 day “waiting period” after enrollment, before a warranty begins. Additionally, if there is question as to the adequate installation of a system, there might be additional fees. For example, if a water heater did not have an earthquake strap, there might be an additional feel to install one. Finally, if problems compound and several separate repairs are required, multiple service fees may be charged, even though the service provider only made one call to your home.
Peace of mind can be worth quite a lot, and a home warranty might offer just that. When selling or buying a house, a home warranty can be just the ticket to ease troubled minds.
Purchasing a home warranty involves doing some leg-work to understand just what is covered, for how long, and for whom. Ensuring that each party understands the nature of the warranty is critical, but in the end it might be a good deal for everyone involved. Only you can decide.
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