December 2, 2008

Is a Home warranty a good idea?

A little while ago I received a flyer along with my mortgage statement advertising a home warranty from American Home Shield for $356 a year. The idea intrigued me. Yesterday I talked about the cost of home maintenance. If you got a home warranty to cover your home repairs then this would make those expenses predictable. You wouldn't have to worry about a pipe busting and leaving you with a $1,500 plumber bill or having your furnace go out and leave you owing several hundred to the heating repair folks. On the other hand my own home repair and maintenance costs haven't come close to averaging $356 a year. This brings me to the question of whether or not a home warranty is a good idea?

To figure if a home warranty is a good buy or not you have to know how much it would cover, how good the product is and then compare those things to how much it would actually cost you if you didn't have a warranty.

How much do warranties cost and what do they cover?

Some examples of home warranty companies and coverage offerings are below. The exact cost and coverage details may vary by location and size of the home.

American Home Shield
$356 / year with $60 fee for service calls. They cover:
Heating, Ductwork, Plumbing, Garbage Disposals, Plumbing Stoppages, Electrical System, Ceiling Fans, Built-in Microwaves, Water Heater, Ranges, Ovens, Cooktops, Dishwashers
$144 more they'll also cover: Central A/C, Refrigerator, Washer/Dryer, Garage Door Opener
You can add coverage for a Spa or pool for $160 or a well pump for $80.

Old Republic Home Protection
$260 a year for 'New Comprehensive plan' in California, $55 for service call. Plan details: California Plan Information
Coverage includes: Heating, plumbing leaks, toilets, water heater, electrical system, garage door opener, dishwasher, oven, ceiling fans, telephone wiring, garbage disposal, built in microwave, limited pest control
With various upgrades such as : air conditioner $60, well pump $100, swimming pool, spa or hot tub $125, roof leak repair $100.

Home Warranty of America
$300 a year and a $60 service fee they cover: Electrical, sump pump, dishwasher, garbage disposal, built in microwave, range/oven, ceiling fans, central vacuum, refrigerator, burglar and fire alarm, washer and dryer
For $69 more they add heating, water heater, plumbing
Air conditioning $120, garage door $20, spa or pool $150, well pump $85

Home warranties cost around $250-500 a year base cost with additional charges for specific systems. Generally they cover major appliances, heating, plumbing and electrical. Home warranties do NOT cover exterior things like paint, siding or roofing.

What is the quality of service?
The website Home Warranty Reviews has hundreds of reviews of home warranty companies. The best rated companies only have scores of around 2.3-2.5 out of 5. So they do not get very good reviews. Reading threw the review comments it seems that common complaints are slowness for repairs, poor quality service or having problems declared pre-existing and therefore not covered. Looking at these average scores and the general nature of the reviews it seems that the support and service offered by the warranty companies might be low. What good is paying for insurance if you just get the run around from the insurance company when it comes time to make a claim? Not much.

How much would a warranty save you?

This question is very hard to answer in general way. As I discussed previously the typical annual cost of home repair and maintenance is varies widely from one home to another. You might spend as little as a couple hundred dollars annually on average up to a few thousand. It all depends on the state of the home in question. The bottom line here is that we really don't know how much home maintenance would cost and the best you can do is estimate based on an individual home.

My verdict:

Its hard to really quantify the value of insurance without knowing the expected costs you'd see. Overall I would say that a home warranty is probably not worth the purchase for most home owners. Home warranties exclude exterior repairs so they'd only cover part of your home repair and maintenance costs. The contracts exclude many things and from the reviews it seems that in general the warranty companies can be difficult to get repairs and payments from. A home warranty might be worth buying if your home is very old or in disrepair and you can't self insure. Usually I think home warranties are probably not worth the cost. Generally home repairs should be something you can cover from an emergency fund.

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