Is a home warranty worth the investment? The answer: it depends.  

There are a number of factors that can affect the ROI on a home warranty. Read on to find out what you need to know. 

What is a home warranty? 

A home warranty can cover repairs or replacements for a multitude of systems and items in your home, such as plumbing, HVAC and appliances to name a few. Most warranties have a certain degree of basic coverage included at a standard price with the option of adding specific items for additional coverage.  

How does it work? 

Although most companies and plans provide a specific type of coverage, most operate in a similar manner and contain common language.  If a system or appliance breaks down, you can call the warranty company who will send an approved service provider to address the issue. If the system or appliance is malfunctioning and cannot be repaired, depending on the coverage, the home warranty company can pay to replace and install a new appliance. 

What’s a common misconception? 

A home warranty is not the same as home insurance and should not be considered as a substitute. Insurance is a necessity whereas a warranty is a choice. A home warranty covers specific parts of a home and issues arising due to everyday wear and tear while home insurance typically covers damage and loss from issues such as natural calamities. Most people look at a home warranty as financial protection against unexpected home repairs, although as we’ll outline in this piece, that protection can depend on many factors. 

How much does a warranty cost? 

Typical costs are $250 to $500 a year for the warranty policy itself.  However, service calls are an additional cost, which is outlined in the contract. You’ll definitely want to factor that in when considering the overall cost of the policy.  

For example, if you’re paying $500 a year and each service call costs $100, you’ll need to consider the age of your home and what your policy covers in order to determine whether you expect to have enough issues to recoup those costs. 

A home warranty can often work to your advantage if you end up needing a major repair or if your home and/or your appliances are older than ten years. 

For issues not under warranty, you will still have to pay the full price out of pocket. Items on each policy can vary from policy to policy and are often very specific. Discuss your coverage when you sign up and carefully read the fine print.  

What does it cover? 

Typically, coverage includes electrical and plumbing systems, heating and cooling systems, kitchen appliances such as your oven and trash disposal and even your washer and dryer. Some things that might not be covered or might require an add-on expense include appliances outside the structure of your home such as the garage door or garden sprinklers and your pool or outdoor grill, among others. Do your homework and shop around for quotes with multiple warranty companies and remember to review any fine print. 

Advantages 

• If your home is older or you anticipate major expenses to covered systems, a home warranty can be a great way to save money. For example, if your HVAC system breaks, a home warranty can help you come out ahead.   

• Another plus is that you can often get covered issues resolved fairly quickly and with little stress. You simply call the warranty company and they send a vendor to do repairs.  
  

Disadvantages 

• You pay for coverage even if you don’t use it. For example, if your policy costs $500, that’s $500 you’ll be spending even if the property has no issues that year. 
• You pay for every service call on top of your policy cost. Again, this can work out in your favor with a major problem, but while you think you’re paying $500 for a policy, it may end up being $900 with four service calls at $100 each.  
• “Pre-existing conditions” exist. Often, there are items the warranty won’t cover, even if they are in the contract. These are specialty items that were already broken in the home prior to the policy going into effect.   
• Much like medical coverage, home warranties often have deductibles. Be sure to check the fine print to figure out what that can mean. 

• Waiting periods mean that you can’t get a policy and call for a vendor the next day. The wait time varies, so be sure to ask. 
• You can’t choose your own vendor. When you need a repair, the warranty company will decide what company to dispatch.  
• There’s often a cap on how many vendor visits can happen each year or each month. Again, be sure to read your contract carefully. 
• You may pay for the policy and a trip charge only to find that the part or issue isn’t covered. Unfortunately, then you need to pay for your own repair on top of the policy cost. 
• If you’re an investor with multiple properties, the less likely it becomes that home warranties will save you money. You should analyze your costs to find the breakeven point to determine if a warranty is a worthwhile investment.  

• Some items are prorated in terms of coverage, based on the age of the product or system. 
  
  

As you’ve probably realized by now, whether a home warranty pays off or not can be a highly variable situation based on many, often unpredictable, factors. Much of it boils down to your predicted costs, the number of properties you own, your financial situation and your appetite for risk.  

Our parting words—always read the fine print and know what you’re paying for. Otherwise, you might be taken by surprise. 

If you’d like to know other things to look for to help you make the best return on your investment property, then download our Comprehensive Guide to Property Management.