Thinking of Purchasing a Home Warranty?

Although the housing market has begun to improve across the country many areas are still having a hard time. Many homeowners looking to sell in these pockets of the country must find ways to entice buyers; or be forced to significantly reduce or their price or put off selling all together. Traditionally home warranties are a way sellers can entice buyers to make the leap of buying a home. The idea is that a home warranty significantly reduces the chances that new homeowners will have to shell out additional money on repairs for a home they just purchased. While in theory this should make purchasing a house easier, do home warranties really hold much worth to potential home buyers?

One of the major considerations when it comes to home warranties is what exactly is covered. The problem is that each warranty and warranty provider is vastly different. It is unwise to make any assumptions when it comes to the home warranty provided. If the seller has already made arrangements for a home warranty be sure to understand what is included. According to Money Magazine the average American homeowner spends over $1,000 a year on typical household repairs and maintenance. Often home warranties will do nothing to decrease this number because of their limited scope. A warranty is only as useful as what is included within it – so be sure to spend time going over the details and ask questions!

Another consideration is the fact that a warranty creates a middle man in the process of home repairs. If an appliance breaks the homeowner does not get to call their favorite mechanic or home handyman who can come by that afternoon but instead usually has to call the warranty company or 1-800. The warranty company then contacts their “preferred” repair company in the area which then calls the homeowner to schedule their appointment. While not necessarily a huge deal, this could become a major annoyance if a major appliance broke during an important time; say the oven during Thanksgiving or the holidays.

A final consideration is the lack of decision making power the homeowner often has under a home warranty. The decision to repair or to replace is no longer a personal one but instead a mathematical one. The insurance company must make a judgment of whether it makes more sense for them to repair or replace, not which makes more sense for the homeowner. Usually companies that issue warranties will receive information from the homeowner, and sometimes the maintenance workers who come to the home. Information such as year, model, problems, replacement parts and historical data are all examined, usually quickly through an automated process, to determine whether the expected cost of repairing or replacing is less. This can be a major problem if for example an insurance company usually only expects to sell a policy to a homeowner for a couple years but the homeowner is planning on staying in the house for many decades. If a homeowner is going to stay in the same house for a long time replacing an appliance, such as a water heater, is probably a more cost effective solution than a repair that is most likely going to break again in a few years. To the insurance company however, it makes more sense to pay the smaller cost to repair the water heater, since they do not expect to still have the policy holder for much longer. Basically, if the incentives and plans of the homeowner and insurer do not align then the repair or replace decision is likely to cause some difficulties.

Overall it is hard to judge the worthwhileness of a home warranty. The details of what is covered, how repairs work, and what companies the warranty provider works with varies vastly between each warranty and provider. However, there may be situations where purchasing a home warranty makes sense, such as a new homeowner who just maxed on their budget to purchase a home with a very old and necessary appliance. It is probably worthwhile for this new homeowner to look into a possible home warranty to cover the appliance for the next year or so while their finances recover from their recent purchase. It is important to note however, that just because a potential seller is willing to throw in a home warranty does not mean that the house listed should be more attractive to a potential buyer. It is important to take time and understand exactly what a home warranty entails before making a decision.

Stephen Padgett

Stephen Padgett

Stephen Padgett is a current junior at the University of North Carolina at Chapel Hill. He is working toward a BA in Economics and Political Science and plans on graduating early in December of 2012. Although he does not know what he wants to do for his career, he is looking forward to an opportunity with Credit Suisse’s Operations Team this summer in Raleigh.

Financially Stephen grew up in a family that preached saving and living below your means. That, in part, translated to his interest in Economics, especially how economics can affect individuals’ financial lives. Through his financial markets class in the fall of 2011, he furthered this interest by analyzing macroeconomic events. Stephen believes that finance, personal finance in particular, is a subject severely left out when it comes to public schooling in this country, and it is a problem that has manifested itself and contributed to many of the problems seen today. He also believes that education is the key to improvement and hopes that through his writings he will be able help people learn about finance, macroeconomics, and how to be financially savvy for the future.

In his free time Stephen enjoys playing and watching sports, wakeboarding, sailing, and country music. At UNC he has participated in Strive for College, UNC Dance Marathon, and UNC Relay for Life.
Stephen Padgett

Latest posts by Stephen Padgett (see all)