Home Warranties: Should I get a home warranty when I purchase my home?

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A: The choice of whether or not you should get a home warranty can often be a difficult one. It is imperative that you have the home properly inspected, you know the age of the home along with the age and working condition of the appliances, plumbing and HVAC systems.

Home warranties generally cover appliances, heating and air conditioning and plumbing.

Whether or not a Home Warranty policy is appropriate for you will depend on your personal situation—from finances to your risk tolerance level.

It is always imperative that you utilize a quality home inspector prior to purchasing a new home or a resale (home sold to you by a previous owner) to help protect your home warranty position.

Many of those who have utilized home warranties—and it covered the repair feel that it is worthwhile—while those who have utilized the home warranty and it did not cover the repair or replacement feel that it is a rip-off.

Many homeowners say that a home warranty policy gives them peace of mind.

Be sure to read the fine print and other hidden or not readily apparent terms and conditions on the home warranty policy.

For example, say your 15-year-old refrigerator springs a leak, what would you do? Your first option may be to decide between a costly repair and an even costlier replacement.

However, if you had a home warranty policy, a repair could possibly be free.

An "Existing" Home Warranty generally cover repairs on specific home elements, such as built-in appliances, heating and air conditioning systems, and plumbing on a "resale home" such as one you just bought from a previous homeowner.

"A home warranty contract is generally for one year (although some companies offer longer terms) and most policies promise to keep working items working for the time period stated in the contract, usually one year.”

There are generally two types of home warranties that are available:

NEW HOMES---Offered By Homebuilders

Also Called 2-10 Warranty—5-20 Warranty— or Homebuilder Warranty.  Homebuilder warranties are generally offered on newly built homes.

The cost of the warranty is included in the price of the new home. Builder warranty policies typically cover up to 10 years of structural defects; one year of coverage on items such as stucco, drywall and paint; and two years of coverage on HVAC, plumbing and electrical systems. Appliances are typically covered for about six to twelve months.

Some Builders of upscale homes may even offer a policy that covers 20 years on structural defects, 5 years of coverage on items such as stucco, drywall and paint; and 5 years of coverage on HVAC, plumbing and electrical systems. Appliances are typically covered for about two years. Very few builders offer this type of policy.

In the event that you have to report a one year workmanship or two year systems defect you must follow the directions outlined in the policy.

Most policies normally have you complete "The Notice Of Complaint Form" that is normally found in the warranty booklet.

You will then normally have to send one copy of the "Notice" to the builder and one copy along with the "Certificate of Warranty Coverage" and a "copy of all correspondence" you and your builder had about the warranty defect(s) in question to the Home Warranty Administration office listed in the Booklet or otherwise designated.

If you have an emergency situation related to the warranty and your home—you generally must try to contact the builder and if unsuccessful—make minimal repairs to prevent further damage until authorization for more extensive repairs have been approved.

Be sure to inform the builder as soon as practical—such as the next business day—if you find yourself in that situation. Failure to do so may result in the denial of your claim.

Other concerns if you have a 2-10 warranty include the following:

You must realize that if you have to go to arbitration and your builder cannot or will not participate you may have to pay a one time claim deductible (usually $250 or more) to the Warranty Insurer and the Warranty Insurer will adjust the claim if that is included in your policy.

In addition, you should "always be aware" of the time limits listed in the policy as they are a material condition of Your Limited Warranty.

The 10 year "Structural Defect" aspects of a 2-10 warranty could possibly be misleading

Therefore, it is imperative that you read and know what is—and is not covered—as you could be surprised by what is not covered.

When after buying a new home you notice any problems it is best to address them within the first year. After the first and second year there are many exclusions.

The reporting of a "structural defect" works pretty much the same as "reporting a workmanship" or "two year system defect."

However, on many policies you can just complete the notice form and send a copy of your Certificate of Warranty Coverage along with a "claim investigation fee—usually $250 or more" payable to the warranty insurer stated on your Certificate of Warranty Coverage to the address stated in the policy or otherwise noted.

Whether reporting a "one year workmanship", "two year system defect" or a "structural defect" it is highly recommended that you keep copies of all your correspondence. You should also send the notice by certified mail with return receipt requested.

EXISTING HOMES---Homes Sold By A Previous Owner

Also Called: Resale Warranties—1 year Homeowner Warranty

Home warranty company policies for existing homes are available from a large number of companies.

There are many companies that sell policies to purchasers of existing homes. In many cases, the home seller or real estate agent may pay for these policies. Policies typically cost three to five hundred dollars and the policy is included as part of the sale of the home.

These policies usually cover one year of repairs on various appliances in the home, along with its furnace, air conditioning and plumbing.

Many home warranty policies have a deductible of around $75 to $100 or the cost of a repair, whichever is less. The deductible applies to each repair that occurs.

Home warranty policies also are available directly to homeowners and homebuyers, who may purchase them in certain circumstances—such as after buying a foreclosure.

"Banks, HUD, and other government agencies don’t typically pay for a home warranty on a foreclosure or short sale, however as a homebuyer you can purchase a Home Warranty policy if you wish.

Auctioneer’s and For Sale By Owner Seller’s also will normally not pay for a Home Warranty. However, with the current housing market depressed in many areas in the U.S. it may be negotiable.

Also realize that with many Home Warranty companies less than 30 percent of their business comes directly from homeowners.

OTHER HOME WARRANTY CONCERNS

Although your home warranty policy may appear to offer you peace of mind, you should not have unrealistic or misguided expectations about what your home warranty policy will cover.

An Existing Home Warranty is a service protection plan that covers the maintenance expenses associated with household items such as refrigerator, dishwasher, HVAC units, plumbing system, electrical wiring and other covered items stated in the policy.

Your home owner’s insurance will generally insure against natural disasters such as fire, flood, and roof damage but it will NOT cover the maintenance and repair charges of the appliances listed above if they were to become inoperative or needed replacing.

Say your air conditioner or heater was to stop working, you would then place a service request with your home warranty company and they would send a technician out for repair.

An Existing Home Warranty plan would also replace the equipment if it could not be repaired.

An Existing Home Warranty would essentially give you peace of mind if the Home Warranty worked out to your benefit and the fine print did not exclude the repair or replacement.

You would not have to spend thousands of dollars on your dying air conditioner if it was to break in the middle of the summer.

As you can see whether or not you desire a home warranty depends in large part on your personal financial strength and whether you have an adequate emergency fund, properly funded retirement/education fund---or you are on track, a low debt load and positive financial ratios.

If you don’t have the proper means to replace an aging heater it may be wise for you to have a Home Warranty.

If on the other hand you have adequate funds and are otherwise in a strong financial position and you believe your home and appliances are fairly new and/or in good working order you may decide not to have one.

It is basically a gamble on your part as to whether you should have one.

I have seen many homeowners purchase a home and go years without any problem and I have also seen many purchase a home and have major problems within the first year.

Depending on your circumstances you may choose not to purchase a Home Warranty—however if the agent or home seller offers it—it is in your best interest to accept it as it can only help you, plus as an added bonus—you as the home purchaser did not have to pay for the policy.

Also, keep in mind that one of the main reasons for dissatisfaction by homeowners who have a home warranty is that the plan does not cover certain conditions such as pre-existing conditions, repair needs due to the lack of maintenance and care, and neglect.

Such conditions are generally mentioned in the small print in the contract and since most consumers don’t adequately read the fine print it is easy to miss.

There are now some companies that offer home warranty plans that provide flexible coverage. You will usually have to pay an additional fee, and you can get coverage for pre-existing conditions and lack of maintenance which are generally not covered by most basic plans.

Why doesn’t the Home Warranty plans offer all inclusive coverage such as other insurance policies?

It basically comes down to profit margin!

Say you purchase a home from a seller and the Home Warranty is provided by the seller. The seller paid $450 for the Home Warranty. The likelihood of major appliance going broke would cost you more (and it might cost more than the premium the seller paid) to repair or replace the faulty appliance.

The insurance company needs to make its profit margin obviously, so they do not provide a blanket coverage that would blindly cover everything.

If you (or the previous owner) did not take care of your appliances or ignored its maintenance needs, then the Home Warranty would come to your rescue if they provided blanket coverage.

Ahh, but Home Warranty companies are smarter than that…

When you report an incident, the warranty company will send a contractor (generally a third party contractor) to your home.

The contractor is required to check to see if the problem is caused by a lack of maintenance or care. If caused by a lack of maintenance or neglect, the repair work is “not going to be authorized.”

This is one of the reasons your repair work is not covered.

As a home purchaser—you—the new homeowner, was probably not aware of these conditions so you call the customer service department of the Home Warranty company. The claim is not likely to get approved, and—you, the customer would not be happy with the outcome.

It is mandatory that you maintain your home appliances and keep good records, if you do so, your claim more than likely is not going to be rejected and you will be satisfied with your home warranty provider.

However always read the fine print and pay particular attention to exclusions.

Whether you go with the well known companies such as First American, Old Republic, American Home Shield (AHS), 2-10 etc. or with little known companies, you will not get your claims approved if the contractor thinks you did not care for your home appliances.

The second reason for dissatisfaction is that pre-existing conditions are not covered.

The home warranty company expects to start with a clean sheet and they require home owners to fix any pre-existing issues before the new policy becomes effective.

It is a good idea to get the home inspection (use a quality inspector) done before you sign the Home Warranty contract, so that you have proof if necessary.

Other Key Points About Home Warranties:

You should be keenly aware that your goal should be to properly establish an emergency fund of 6 months or more while you have the home warranty protection if you have not established an emergency fund prior to obtaining your home warranty protection.


The purchase or utilization of a home warranty should be a short term strategy on your part and not a strategy where the warranty is used over a long stretch of years on a continuous basis as using a home warranty over time is usually a bad investment when the amounts you pay are annualized and the cash outlay that you put up are evaluated.

For example. if you pay $450 per year for 5 years the total outlay would be $2,350 which is an amount that could fix or replace (with a few exceptions) what the warranty would cover.

Look at a home warranty as being short term protection until you shore up your emergency fund and other areas of your finances.

A home warranty does not take the place of a sound written financial strategy that will put you in a stronger financial position so that you will not need a home warranty.

Also, do not confuse Home Warranties with Warranty Deeds!

Warranty Deeds include the following:

Bargain & Sale

General

Corporate

Special

Quit-Claim

They are used by the Grantor (one who gives a deed) to convey title at the time of sale or otherwise transfer title and the most common for residential sales are general and special warranty deeds.

A "general" warranty deed is normally used to convey title when a homeowner sells a property. Because there was a homeowner (grantor) involved the homeowner warrants against all defects that the ownership and title is good, property is free from encumbrances, and provides the right to quiet enjoyment.

If you are a buyer (grantee), a general warranty deed provides you with the MOST protection against any other claim to title of the property. You can make a claim against the grantor because the deed warranties against all defects.

For those (banks, government agencies, auction companies and the like) who are not confident about the title history of a property they may now own due to foreclosure or other means—they normally would convey title with a "special" warranty deed.

It is a deed in which the grantor(banks, government agencies, auction companies and the like) LIMITS the title warranty if you were the buyer (grantee).

The grantor does not warrant against title defects arising from conditions that existed BEFORE they owned the property. You can not make a claim by, through, from or under the grantor if you receive a special warranty deed as a home purchaser.

With either type of deed, it is imperative that you get "owner's title insurance" at the time of closing to protect your interest in the property.

As a practical matter most lenders clear up title and other issues when they foreclose on a property, however owner's title insurance is something you should obtain on all real estate that you purchase.

Keep in mind that there are policy limits, therefore you should be aware that if there are future title issues you will only be protected for the amount listed in your policy—usually the purchase price. So, if your property appreciates substantially your protection would be limited to the amount stated in the policy.

What is A Security Deed?

A "Security Deed" is utilized by a purchaser who obtains a loan (grantor) to convey a security interest (in the property in which they are receiving a loan) to the lender. The deed secures to lender the repayment of the loan by the borrower(s).

Failure to repay the loan or any default of the loan gives the lender (and successors or assigns) the right of "power of sale" where they can then foreclose on your property and sell it at public auction.

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