Are Home Warranties Worth It? Pros, Cons, and an Alternative

A home warranty is a service contract that covers the cost of repairs or replacement of home appliances and systems such as plumbing, electrical, heating, and air conditioning. The question is, are home warranties worth it?

If you’re a homeowner, you know that unexpected home repairs can be a real financial burden, especially if you have older appliances or systems. A home warranty can help alleviate this burden by covering the cost of repairs or replacement of these items.

However, it’s important to do your research before purchasing a home warranty. Some warranties have limitations and exclusions, and may not cover all the items you need. It’s also important to read reviews and ratings of warranty companies to ensure you’re getting a reputable service. I’m going to cover both the pros and cons of home warranties, as well as an alternative that I think is just as good as getting one.

Are Home Warranties Worth It? Pros, Cons, and an Alternative to Home Warranties

How Home Warranties Work

Some of the top home warranty companies are American Home Shield, Choice Home Warranty, Select Home Warranty, First American Home Warranty, and Total Home Protection. If you compare these companies to each other, you’ll find the average cost per year is about $750. There are also additional coverages you can purchase that would increase the price, such as if you have additional HVAC systems in your house or a detached garage that has appliances inside.

If you find you need to make a claim for a repair, then you will be charged a flat service fee for one of their approved contractors to come to your home. The average cost of the service fee is about $100. Once you pay the service fee, that is usually all you have to pay as long as the item is covered under your warranty—it’s essentially a deductible.

Regarding the cost, many times, if you wait until your home warranty is up for renewal, you can get a better deal. For example, recently some friends only paid about $400 to renew through 2-10 home warranty even though it is advertised as being around $700/year.

The Pros of Home Warranties

Home warranties can be a really good option for those who are purchasing an older home. You might be unsure of the ages of the appliances, or you might know that many of the appliances are on their last legs. If it seems likely the refrigerator will give out in the coming year, then the cost of a home warranty and service fee may be less than the cost of a new refrigerator. The more appliances that are close to the end, the better of a deal a home warranty will be.

Another pro of a home warranty is that if you are buying a house, you can often negotiate the price of the first year of the warranty into the sale of the house. You will have to pay for subsequent years, but it may be that within that first year of living in the home, you use the home warranty a lot or discover that you don’t have a need for it. Either way, it is a very low cost for you for the first year.

A home warranty is really an insurance policy for the appliances in your home. If you have a hard time setting money aside without pulling from it, then a home warranty will take that temptation away. You’ll know that if anything major fails, you have the home warranty to cover it. You’re paying for peace of mind.

The Cons of Home Warranties

Home warranties are not necessarily the best choice for everyone. They don’t cover everything that can go wrong in your house. In most cases, they are essentially covering appliances and systems such as your plumbing and HVAC. If you bought a brand new home, these items will likely be covered under your builder’s warranty for the first year anyway, making a separate home warranty obsolete.

Another con of home warranties is the cost compared to what is covered. The same friends who negotiated their yearly premium down to $400 had an HVAC problem a few months later. It turned out that that ONE component of the system was not included in the warranty. They ended up paying almost $700 to replace the part, on TOP of the money they had already spent to renew. Then they didn’t have any other issues that year. That $400 felt like a waste of money to them.

In some cases, the home warranty company will offer to pay for a new appliance if it will be more cost effective in repairing the older one. While this may seem like a pro, there is usually a limited choice of what appliances you can choose. For example, just because you had a GE washing machine doesn’t mean they will replace it with a GE washing machine. If you want to choose your own appliance that’s not within their options, you will have to pay the difference in cost.

An Alternative to Home Warranties

Instead of a home warranty, you can create a sinking fund in your budget to sock away money for appliance repairs. If you put this money in a high-yield savings account, then it can earn interest while you wait for the day you have to replace your refrigerator.

To get an idea of how much you should put in your sinking fund, it might help to make a list of how much each appliance would cost to replace and how long they usually last. Here’s my list:

• Washer: $600 every 10 years
• Dryer: $400 every 10 years
• Oven: $800 every 10 years
• Refrigerator: $800 every 14 years
• Dishwasher: $600 every 10 years

Hopefully you won’t need to replace all of these appliances at the same time! If you add up these totals, you get a little over $3000. Most of these appliances will last about 10 years. Let’s say you moved into a house that was about 5 years old. That means in another 5 years, you will likely have to start replacing all of these appliances. So let’s plan to save $3,000 over the course of 5 years. If you put aside $50/month, you’ll have $3,000 in 5 years and have complete control over what you buy.

Setting aside $50/month is essentially insuring yourself. You’ll have to decide if it’s worth the risk, since it will take time to build up enough to replace an appliance. But if you take into account the age of your appliances, your financial situation, and the amount of risk you’re willing to carry, you should be able to question of whether a home warranty is worth it for you!

Looking for other ways to save on things around your house? See 24 ways to save money on utilities!