Without first hand experience, most homeowners have no idea what is a home warranty. They often confuse a home warranty policy with homeowners insurance. These two homeowner finance options are quite different even though you renew and pay both annually.
- Homeowner insurance pays for damage and loss due to covered perils like a fire, hail storm or ice dams. This insurance is always required by the bank or mortgage company to protect their investment.
- A home warranty protects your home's appliances and systems from normal wear and tear. It isn't necessary to have a home warranty. Realtors recommend and typically sellers pay for a one year warranty.
What is a home service warranty?
A warranty is a guarantee issued by a manufacturer, promising to repair or replace a product within a specified period of time. A home warranty is really a home service contract, not a warranty. The name is misleading and yet they market these products using a name that defies explanation.
Even the National Home Service Contract Association (NHSCA) uses the correct terminology. They explain “… they are not in the business of insurance” as that would bring more regulation. Umbrella home warranties are more similar to the warranty offered by your appliance store but …
- The home warranty company is not the builder of your home, or the manufacturer of the products covered by the home service contract. It has no knowledge of your home!
- The home warranty company does not guarantee the same brand when replacing a product. You'll get a budget for a new appliance or a cheaper brand. We got $2,500 to buy a replacement refrigerator at SEARs. Our HVAC horror story began when First American replaced our Trane condenser with a Goodman product that failed the next year (read: Can You Trust a Home Warranty Company?).
- The home warranty company doesn't guarantee the work of their contractors. If the repair is faulty and like my friend's experience, it's been repaired three times – you get to pay for each service call.
What is a home warranty & how much does it cost?
My personal experience says umbrella home warranties are not worth the money being charged. They have no financial incentive to find and fix the problem at it's source, generating many more service calls. Their contractors want to get in and out within an hour, as that's all they're really being paid for … and I expect they don't enjoy negotiating with the home warranty company for more costly repairs because they can't win. That's probably why we went without heat for 3 months – the HVAC company said the problem was resolved?
The real solution is to build a team of home repair contractors. By building a relationship with these local companies, they will teach you about your house and preventive maintenance to minimize repair costs. They'll also help you plan for major replacements as they're inevitable.