You’re probably familiar with homeowners insurance, but fewer people understand the benefits of a home warranty. While insurance is required for most home loans, a home warranty is not. But even though it’s optional, a warranty can be helpful—especially for new homeowners.
What Is a Home Warranty?
A home warranty is a service agreement that can help you cover household expenses that come up due to regular wear and tear. Home warranties typically last for one year and provide a set monetary payout that can be used toward repairs and required upgrades that arise after moving into a new home.
The Difference Between a Home Warranty and Homeowners Insurance
Unlike homeowners insurance, which usually covers losses due to structural damage or theft, a home warranty helps out with your home’s major systems and appliances. It’s a convenient stop-gap that can cover large expenses like new windows, updated plumbing, or replacing a major appliance like a refrigerator. In addition to covering different things, there are some other significant differences between home warranties and home insurance.
- No deductible: There is no deductible to pay with a home warranty. Instead, the home warranty reimburses you for money paid out to replace or repair an appliance or system.
- Limited payouts: While both warranties and insurance come with limits, a home warranty will only pay out the amount set in the terms of the warranty. If you have a $500 home warranty, then that is the maximum reimbursement you can get from the policy, regardless of how much you paid for the repair. For example, if your air conditioner had repairs that totaled $1,000, you could get half of that amount taken care of by your $500 home warranty.
- Time limits: A home warranty is good for a specified amount of time, typically twelve months. After twelve months, the warranty will no longer be valid. Because this is a use-it-or-lose-it situation, make sure you take advantage of the warranty within the required time limit.
- No monthly premiums: Unlike homeowners insurance that you pay for monthly, a home warranty is usually purchased outright. That means you (or the seller) will pay upfront for the home warranty, and there will be no additional costs over the term of the contract. Some companies may offer installment plans, so don’t despair if you’re worried about affording a warranty upfront.
- Warranties can be transferred: The person who purchased the home warranty isn’t the only one who can benefit from it. In fact, it’s common for a seller to purchase a warranty as an extra incentive to buyers. The warranty is attached to the home, not the person, which makes it easy to transfer during a sale.
Important Things To Know About a Home Warranty
As with any insurance or supplemental coverage, you need to understand the limitations and requirements so you can take full advantage of reimbursement or other payouts. Because home warranties can be tricky, here are the most important things to know.
- Coverage can be specific: Not all home warranties cover both major systems and appliances. Some warranties only cover one or the other. Depending on the type of coverage you want, make sure you choose the right policy.
- Not everything is covered: In addition to being specific on a large scale, don’t forget to read the fine print to find any exclusions that may apply. An appliance warranty may not cover every appliance, and HVAC systems are commonly left out of major system coverage. Other things that could be excluded are sprinkler systems, garage doors, and pools and hot tubs.
- You may need to use a preferred provider: Some home warranties come with a list of providers that you need to use in order to make a claim for reimbursement. As with medical coverage, going outside the preferred network could get your claim denied.
Home warranties are a great way to supplement common costs that come up during the first year in any new home. Whether you’re buying or selling—if you’re concerned about issues with appliances or systems—be sure to look at a home warranty as part of your plan.