PFT #102 - Personal Finance Tip of the Week: Should Have a Home Warranty?

A home warranty can be a useful  financial tool for homeowners, especially when major appliances or home systems unexpectedly break down. (This is where the Rainy Day Fund comes into play that we’ve previously covered in previous topics) The cost of these plans averages from $600 to $900 per year, depending on the level of coverage and provider and service calls typically range from $75 to $150 per appointment.

When this occurs the provider has a network of repair technicians to set up appointments. So, this sounds great, right?Maybe, maybe not. First and foremost is to understand what is detailed in the coverage plan. Coverage caps may apply per repair or per year, with typical policy limits ranging from about $2,000 to $6,500 per item, meaning that if a repair exceeds the maximum payout, the homeowner must cover the remaining balance.

Another aspect to the equation is properly maintaining appliances and equipment so that the provider does not cite pre-existing conditions or improper maintenance, which can lead to denied claims.The truth is that modern appliances may last 8–12 years whereas decades ago 20–25 years was common.

So are you better off with a home warranty? It depends, home warranties are not a one-stop shop as there is not a plan that provides silver bullet and you’d need to have multiple policies to manage all of the potential claims that may arise. If you have many older appliances, a home warranty may be better as individual warranties often come with short-term coverage.

The rule of thumb is that you should create a spreadsheet to capture the items that you own, the age of them, the warranty expiration and then factor in the cost of the warranty and its coverage. If you choose a warranty plan, the safest path is to factor the yearly cost into your monthly rainy day fund to pay for the deductibles assessing for coverage limits and your yearly policy cost. If this is the path that you take it is imperative to research extensively before making a decision.  

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