By Marietta Rodriguez, President & CEO, NeighborWorks America
Posted with permission of NeighborWorks America. For more information, visit www.nw.org.
Homeownership remains a strong aspiration for many people and remains a primary mode for wealth building for most Americans. Among the many decisions homebuyers have to make is if purchasing a home warranty makes financial sense. Weighing all the costs of homeownership can be daunting for any homebuyer, but particularly for low- to moderate-income families that are first-time buyers and learning about getting their finances in check to afford their first home (pre- and post-purchase) and counting every penny. It’s hard to know whether a home warranty is a justifiable expense.
NeighborWorks America wants to ensure that people have the proper tools and resources so they are informed consumers from the moment they consider owning a home, and its network provides housing counselors who can educate consumers from the start of the process to the finish.
When a person purchases a home, they often will be offered a home warranty. A home warranty is not to be confused with homeowners insurance, which covers damage caused to the home by events like fires, theft and natural disasters. A home warranty is a service contract that covers the repair or replacement costs of home appliances such as a broken furnace or dishwasher. The seller may offer to purchase a home warranty on the buyer’s behalf to address any concerns they may have, or the buyer will likely receive mail solicitations once the sale closes. A consumer could also reach out to a company to purchase a home warranty after closing.
A home warranty can provide the peace of mind a homeowner is looking for, but they must read the fine print carefully. Not all warranties are created equal and consumers want a home warranty service that best serves their needs. They need to understand the exclusions and limitations of the home warranties they research. Some home warranty companies have overall limits, where they’ll only pay a certain dollar amount out for each repair in the home. Once that limit is hit, all of the repairs and replacements come out of your budget. Others place dollar amount limits on certain items, so the homeowner pays the rest. Some home warranty companies will also allow you to receive a cash-in-lieu option, where you simply get what the home warranty company would have paid to replace the system or appliance. Pay attention to lower-priced home warranty companies because they likely have significantly less coverage and higher limits than their higher cost counterparts.
The local community development organizations in the NeighborWorks network have found ways to help homeowners decide whether a home warranty is right for them. NeighborWorks network organization Neighborhood Housing Services of the Inland Empire (NHSIE) (San Bernadino, California) has historically purchased a home warranty for all homebuyers who have bought a home from its Acquisition Rehab and Resale Program. The organization believes home warranties allow buyers to put their mind at ease when they move into a home, knowing that any repair and replacement of many major systems or appliances that might breakdown due to normal wear and tear will be covered. In NHSIE’s Homes and Hammers post-purchase class, the instructors educate new homeowners about the benefits of a home warranty, what they might cover and how long they generally last, in addition to tips and resource for maintaining their home.
Additionally, NeighborWorks Northeastern Pennsylvania (Scranton, Pennsylvania) highlights home warranties in its homebuyer education course and specifically when discussing what to look for in a home inspection. The organization advises the prospective buyer to ask if there has been any major work recently completed at the property (such as HVAC, plumbing, electrical, or on the roof) which may have work or materials that may be covered by a warranty; if so, they should check if the warranties are transferrable (and how).
A home warranty typically covers most major components of large home systems, such as the HVAC (central heating ventilation air condition), hot water heaters, and plumbing. It may also cover regular appliances such as washers, dryers, refrigerators and stoves. When a covered repair is needed, consumers call their home warranty company. They can set up an appointment with a licensed service provider in their area that is covered by the plan. The consumer typically only pays the service call fee for a covered repair.
Depending on the provider and location, a home warranty costs a few hundred dollars a year, paid up front (or in installments, if the warranty company offers a payment plan) for a policy that includes most major appliances and home systems. You can add on coverage for additional larger systems. Most home warranty terms are one year and in most cases are renewable.
Weighing the pros and cons of purchasing a home warranty is an important step for homeowners. They need to closely read the terms and conditions of the agreement, as home warranties often include clauses addressing conditions under which coverage would be denied.
Marietta Rodriguez blog, 2/7/2019, www.nw.org
A home warranty has definite benefits. For a homeowner who doesn’t have emergency savings, a home warranty can protect them financially. Home warranties are also helpful for people who aren’t handy or don’t want to have to track down a contractor when a problem arises. Home warranties make sense for first-time homeowners, who may not be as familiar with how their new home’s systems work.
One major problem with a home warranty is that it will not cover items that have not been properly maintained. What is considered proper maintenance can be a significant gray area and causes many disagreements between home warranty companies and warranty holders. That’s why it’s important to read and be clear about what is covered by the warranty and what is not. When a homeowner purchases an existing home, it might come with older appliances that the previous owner may not have maintained. The manufacturer’s warranty that comes with appliances generally only covers replacement and repair for about a year.
Weighing the pros and cons of purchasing a home warranty is an important step for homeowners. They need to closely read the terms and conditions of the agreement, as home warranties often include clauses addressing conditions under which coverage would be denied. HUD-approved counselors are available at NeighborWorks organizations around the country to help consumers understand the paperwork. Making the homeownership leap is often stressful and understanding how to navigate additional budget items—like a home warranty—can reduce that burden.
