How to determine if a home warranty is worth the cost

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home warranty

home warrantyWhen you buy a house and spend thousands of dollars on a down payment, closing costs, inspection, and all of the other related expenses and fees, the last thing you want to do is move in and immediately have to spend money repairing and replacing items.  Yet, that’s what many new homeowners have to do.

We bought a house, and less than a week later, we discovered the water heater had stopped working and had been leaking into the house for three or four days.  Even though most people have inspections before buying a house, many of them have similar experiences as ours or even worse problems that need to be fixed soon after they move in.

One way you can protect yourself is with a home warranty.  Yet, are they worth the expense?

The answer is not clear-cut.  It largely depends on your financial situation and how handy around the house you are.

Ask yourself these questions:

  1.  How old is the house?  What shape is the house in?  Is there anything the inspection turned up that may go wrong soon?  Our house is 17 years old and has the original air conditioning unit.  We were told that could go out at any time, and at $3,500 to $5,000, replacing it won’t be cheap.
  2.  Could I financially afford to make a large repair or replacement?  If you’re financially comfortable and have a good size emergency fund, you don’t necessarily need to spend a few hundred dollars a year on a warranty.
  3.  Can I fix most problems around the house?  Most repairs around the house are so expensive because of the labor costs involved.  If you feel confident making the repairs yourself, you’ll save a bundle on labor and may not need the warranty.
  4.  What does the home warranty cover?  Not all home warranties are created equal.  Some will cover the majority of the cost of the repair or replacement while others will only cover it up to a certain amount, say $1,000 or $1,500.  If you’re already paying $500 a year for the warranty and the warranty only covers a maximum of $1,000, then purchasing one doesn’t save you a great deal financially.  If, however, it will cover the majority of the repair or replacement, a warranty might be a good idea.
  5.  Are you ready to jump through hoops?  When you have repairs or a replacement through a warranty company, you lose much of your voice.  You have to work with the company that the home warranty company endorses, and you don’t get to choose the replacement on your own.  Likely, if you need a replacement as we did with our water heater, you’ll get the exact same brand and model.

Even with so many constraints, a home warranty can be a good investment, especially if you don’t have a large emergency fund.

Do you have a home warranty, or do you consider them a waste of money?