A home warranty is a supplement to homeowner’s insurance. It is not an insurance policy in its own right. Rather, it is a service contract for the repair or replacement of covered appliances and systems in the home. It does not cover any damage to the home. Its main purpose is to add value to a home that is for sale.
The cost of a warranty is generally paid for at home sales contract signings by sellers. On occasion, the cost will be picked up by the real estate agent. The home buyer will have an option prior to the expiration of the warranty to extend the coverage for a monthly payment. They are attractive to home buyers because they serve to protect them against repair and replacement costs at a time when they can least afford it financially.
Warranty companies do not do the repair work themselves. Instead, they subcontract the work out to local home repair service providers. Some home owners have expressed some frustration with lag time, reporting that it can take anywhere from 3 to 5 days for a repair technician to show up. Also, some claims for warranty repair might be denied if there is evidence of improper maintenance or excessive wear. They might also refuse to do work when it is apparent that you tried to fix the problem first and failed.
According to the National Home Service Contract Association, basic warranties cost $350 to $500 a year. For that price, the warranty company will pay for repair or replacement of most major appliances and systems in the home. They will not, however, pay the cost of repairs of any damage to the home due to the failure of the covered systems or appliances. For example, the warranty might cover repair of broken pipes, but will not cover the water damage the resulted from the pipes bursting. That damage is normally covered by the home owner’s insurance policy.
These warranty providers are frequently seen at home sales trade shows. They are an attractive option for home sellers to add value in competitive real estate markets. Home buyers will occasionally decide to continue the coverage upon the expiration of the original contract. The cost of these warranties rise as the home ages, but can be renewed for terms as long as five years. Usually, however, only about 25% of home buyers ever choose to renew the coverage. This is because the warranty has done its job after the first year or two by protecting the buyer from a large expense soon after they have typically depleted their savings in making the down payment on the home.
Home repair warranties are service contracts, not insurance policies. As such, they are not regulated in the same way as home owner’s policies. Each state regulates insurance policies themselves. But contracts are governed simply by the rules of contract law.
The real value in these warranties is not in the repairs that they cover. The value is in that they make a home, especially an older home, more attractive to prospective home buyers. The peace of mind they seem to afford has on occasion been the deciding factor for home buyers. The warranty companies are in the business of making money, not paying for repairs. And the reality is that their services are rarely needed during the contract term. This is a reason why home owners generally do not renew these contracts. They realize rather quickly that they would be much better off by paying into a savings account for future repair costs rather than paying as monthly fee for a home warranty they will likely not use.