What Is A Home Warranty And Do You Need One?

Real estate is my favorite asset class to build long term wealth. It's understandable, generates rent, appreciates slightly faster than inflation on average, and provides shelter. But buying a home can be expensive. If you are able to buy a home, you will inevitably come across the decision to buy a home warranty or not.

This article will help you decide if purchasing a home warranty is worth it or not, how much they cost, and more. There's a lot to consider when you purchase property. Besides a warranty, you have to consider the initial purchase price, ongoing maintenance, and normal wear and tear of the appliances.

What Is A Home Warranty?

A home warranty is a service contract that covers the working parts of your home that may be near the end of their functioning life. As a customary offer of good faith, your real estate agent sometimes buys one that will cover you for one year.

In most cases the home warranty coverage is meant to service the covered items, not replace them. Although ultimately the coverage may cover the cost of replacing an air conditioner or dishwasher if it is deemed too costly to repair.

The home warranty premium is usually paid up front for the entire year. But sometimes, you can pay your home warranty premium in monthly installments.

Unless you select a higher priced premium plan, you’ll also need to pay a service fee to a technician to verify any claims you request for repairs or replacement of covered items.

Home warranties are completely optional. Unlike homeowners insurance, mortgage lenders don’t require that you purchase or maintain a home warranty.

If you're looking to get a homeowners insurance policy, check out Policygenius. They are a one stop shop online marketplace where insurance companies compete for your business instead of you having to fill out an application one by one with each carrier.

What Does A Home Warranty Cover?

The home warranty generally covers the following items:

  • Electrical systems
  • Plumbing systems
  • Heating and air conditioning systems
  • Washers and dryers
  • Kitchen appliances

Don't confuse a home warranty with home insurance. Home insurance covers things like theft of personal belongings, damage from fire, flooding, and other disasters, and liability if someone injures themselves on your property.

As you can see from the home warranty coverage list, if you are purchasing a recently remodeled home with updated systems, then it is best you purchase a home warranty system.

I recently remodeled my kitchen in San Francisco and it cost about $60,000. My Thermador Professional range alone cost $4,500, followed by $3,000 for a Bosche fridge, $2,000 for a Thermador dishwasher, and $600 for a Blanco faucet.

In addition to the above items, you might be able to cover the following by paying an extra premium for each component:

  • Pool/hot tub
  • Septic system
  • Water softener
  • Sprinkler
  • Well pump

I also bought a $15,000 Sundance hot tub for my home which requires annual maintenance. I love the hot tub to death as I use it 3X a week after playing tennis. But the hot tub has its own service plan I can buy when there is a need.

However, make sure you read the details of a home warranty contract before you sign. You don't want to purchase a plan you think covers one thing, but actually doesn't when it comes time to utilize the warranty.

How Much Does A Home Warranty Cost?

According to Consumer Affairs, home warranty premiums range from $300 to $600 per year. My realtor purchased my home warranty plan for only $365 when I bought a $1,800,000 fixer-upper in San Francisco. Even though I tore everything out of the kitchen and replaced everything with new appliances, I still get to use the warranty.

Given the cost of a home warranty is usually only $300 – $600 a year, most buyers simply pay for the entire cost up front. Sometimes, the home seller will include a home warranty to sweeten an offer. It never hurts to ask if you are buying a home.

You can also select specific “appliance” or “system” plans, if you want coverage for one or the other instead of both. There are other factors and costs that go into the price of your home warranty that will have an impact on how much you’ll spend.

Related: Taking $2,000 Bubble Baths – A Home Maintenance Story

Watch Out For Service Fees

What Is A Home Warranty And Do You Need One?

You’ll want to take a look at your policy to find out how much your home warranty deductible is. You may also see it called a “service fee” or “call fee.” The fee pays the technician that makes the service call to see what’s wrong with whatever covered item you’re calling about.

You can choose a plan with the service fee built in, but the premiums for those plans will be more expensive. If you pick a regular plan, you’ll typically pay a service fee between $50 and $125. Service fees are additional expenses that above the cost of the monthly or annual premium payment for the warranty plan selected.

The easiest thing you can do is just buy a comprehensive home warranty plan that includes all service fees. When you're buying a new home, you've already got a lot going on.

Related: Should Homeownership Still Be The American Dream?

The Negatives Of A Home Warranty

There are pros and cons to everything. Here are some negatives of a home warranty.

  • Your claim can be denied. Just like the horror stories you hear about health insurance companies rejecting patients for pre-existing conditions, the same can happen for your home warranty claim.
  • You might have a bad contractor. The home warranty company will pick your contractor even if you have a trusted one you've used for a while. As a result, you might get poor service and quality work.  
  • You might not get your appliances replaced. It's always great to simply get a new replacement appliance. However, the service technician might want to repair an old appliance instead. Therefore, it's better to get a home warranty if you have new or newer appliances.
  • The cost. You'll be shelling out $300 – $600 a year on average.

How To Buy A Home Warranty

Ask your real estate agent to buy you one. Your real estate agent is likely earning at least a 2.5% commission fee for helping you buy your home. Therefore, ask if s/he can buy one for you. This is the easiest way to get a home warranty policy.

Negotiate a policy with the home seller. Your real estate agent is probably the best starting place for home warranty shopping. Home warranty companies often provide flyers and brochures at open houses, and tend to work with agents to help solicit their products. Sellers may offer to pay for one if the home for sale is older and hasn’t had recent upgrades.

Compare your options online. Simply do a Google search to see what the best home warranty plans are that fit your budget and criteria.

When You Should Buy A Home Warranty

Home warranties can provide an extra financial buffer for homeowners, and may be a good fit in the following situations.

  1. You lack do-it-yourself skills
  2. You're a first-time homebuyer on a tight budget
  3. You're buying an older home with older appliances and older systems or you're buying a newer home with newer, more expensive appliances and systems
  4. You like the peace of mind of having a home warranty.
  5. You've had a thorough home inspection report that highlights risks to your appliances and home systems.

A home warranty can help you feel more comfortable that you're not going to shell out an extra small fortune after purchase. Therefore, as a multi-property owner who has had to fix many appliances and upgrade some systems before, I think getting a home warranty is a good idea.

Other Real Estate Recommendations

Get homeowners insurance: A home warranty isn't a necessity. However, homeowners insurance is. Get a great homeowners insurance quote with Policygenius. Let insurance companies compete for your business. This way, you're insured a fantastic rate.

Take advantage of lower mortgage rates: Check the latest mortgage rates online to see what's out there. Access one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible from them or your existing bank. Compare multiple real quotes, all in one place for free. When banks compete, you win. 

Diversify your real estate investments: It's always good to diversify your real estate holdings beyond just a primary residence. Check out Fundrise, the top real estate crowdfunding platform today. They allow you to invest in commercial real estate properties all around the country that were once only available for institutional or ultra-high net worth investors.

I've personally invested $810,000 in real estate crowdfunding after selling one of my SF rental properties to diversify my holdings and take advantage of lower valuations and higher net rental yields in the heartland of America. With interest rates declining, real estate is going to receive more demand going forward.