When you purchase a home, you probably already know that unless you’re paying cash (and even if you are) you’ll need homeowner’s insurance, which protects the house from unexpected and catastrophic damage, and is also required by your lender. That policy will cover you in case of fire, wind storms or lightning strikes, some types of water damage, theft of personal property — basically, the common sudden accidents that are out of your control.
But what about all the other things that can and do go wrong with your new house? We’ve all heard the stories about buyers who move in only to have the refrigerator break down or the furnace go out within weeks of closing, none of which is covered by your regular homeowner’s policy.
There are extended or separate insurance policies that buyers can purchase, which will potentially protect them from these kinds of expenses, offering specific coverage for items that aren’t included in a standard homeowner’s policy. These policy add-ons, or warranties, are known as home repair insurance, or home warranties. As a new homebuyer, you might feel more comfortable if you know you’re protected from any unforeseen repairs after closing, but do you really need this extra coverage?
We’ve taken a look at some of the options available to homebuyers, as well as checking in with real estate professionals to get their thoughts on the pros and cons of purchasing extra coverage, when it makes sense to do so, and when you’d be better off to skip it and pay for repairs yourself as they crop up.
Home repair insurance
Home repair insurance is a term often used interchangeably with a home warranty, but they aren’t quite the same thing. While home repair insurance covers the same kinds of repairs as a home warranty, it is purchased as an add-on to your homeowner’s policy through your insurance agent. It includes many of the things your regular insurance doesn’t cover, from appliances, electrical wiring, plumbing, garage doors, and any other issues that your homeowner’s policy would consider “normal wear and tear” (and therefore is your responsibility).
While homeowner’s insurance is always required, home repair insurance is optional. Fees for coverage often depend on the age of the home as well as the age of the appliances. Not all insurance agencies offer home repair insurance, and those that do may only offer it in a limited capacity. If you’re looking for a wider range of coverage, your insurance representative or real estate agent is more likely to direct you toward getting a home warranty.
A home warranty is considered a type of home repair insurance, but it is purchased separately and is not part of your homeowner’s policy. Home warranty companies are their own entities, with their own fees and requirements, and they are not associated with other insurance policies, lenders, or real estate agents.
A home warranty covers almost all the repairs your homeowner’s insurance doesn’t. If your fridge goes on the fritz, your air conditioning dies, or even if your garbage disposal decides to stop working, a home warranty can take care of those repairs.
Home warranties are a common negotiating tool in home sales, with sellers often paying for the buyer’s first year of coverage. This protects the buyer if anything breaks down, as well as partially protecting the seller from potential issues if something goes wrong right after closing.
After that first year, the buyer has the option of renewing or dropping the warranty, and this is where you’ll need to decide if you need to keep it or not.
What you get for your money with home repair insurance
Paying for home repair insurance or a home warranty doesn’t automatically mean everything in your home is covered. Some plans only cover major items, like heating or electrical systems. Others have optional add-ons that can include appliances, ceiling fans, or water pumps. For instance, if your home has a septic system and you want it covered, that would likely add more to the cost of the policy.
Additionally, most companies and insurance agencies set limits on the amount they will pay for repairs. If you have a very high-end refrigerator with expensive replacement parts, chances are you might have to pay more out-of-pocket than you might expect, as your insurance or warranty won’t cover it all.
As a buyer, you’ll want to read the fine print and make sure that any added coverage you get will address the things that concern you the most.
When to get additional coverage
Real estate agent Raylene Lewis, who works with 68% more single-family homes than the average agent in College Station, Texas, says that buyers should think long and hard about whether or not they need this type of coverage for their home.
“I feel that a lot of people get home warranties without understanding how it works,” she says.
“You’re going to be paying a yearly fee that typically runs around $700, plus you have to pay a deductible every time they come out. If you keep that policy for multiple years, you’re paying out thousands of dollars.”
For buyers who might have a hard time saving for potential repairs, home repair insurance or a home warranty might be the way to go. “If you live paycheck to paycheck and don’t see yourself being able to set money aside for repairs, maintaining a warranty could be worth it,” says Lewis. “Or if you purchase a home that’s quite old and you know that repairs and maintenance are likely to be ongoing, that extra coverage could be really helpful.”
Lewis says that home repair insurance and home warranties definitely have their place, and asking the seller to pay for a warranty for the first year makes sense. “Nine times out of ten I will recommend a home warranty to the buyer, because it’s something the seller usually expects to pay for anyway — and if something breaks right away, you’re covered,” she explains.
When to skip it
Although having added insurance coverage on your house might seem like a good idea, it isn’t a one-size-fits-all solution.
Lewis says that if a buyer is comfortable financially, with a large down payment and high credit score, she sometimes negotiates the cost of a home warranty as a credit back to the buyers rather than having the seller purchase it. “For some people, time is money,” she says.
Lewis also cautions buyers to consider that going through a home warranty company for repairs isn’t always a quick process.
She explains that if something breaks and the homeowner calls the home repair insurance agent or home warranty company, they don’t typically immediately send the repairman.
“Under a home warranty, they have a certain number of days to send someone out to look at the problem, plus additional time to diagnose the issue and actually get it repaired. If your A/C goes out, you want that taken care of right away, and that won’t happen when you go through a home warranty company.”
For buyers who can afford to pay for repairs as they go, Lewis will usually recommend against home repair insurance or a home warranty. “If you’re the type of consumer who wants it fixed fast and right, and you already have money set aside for home repairs, I feel it’s not worth the hassle and cost,” she says.
“A home warranty can be a great option, but the company is going to make the repairs in a way that is affordable to them. It isn’t always a long-term solution, because most of the time they’re just getting you to the next renewal and the next time they have to come out.”
What’s right for you
Purchasing home repair insurance or a home warranty are things a buyer will ultimately have to decide for themselves, based on their financial situation, the condition of the home they buy, and their future plans for that home. Some buyers might decide they are better off buying a newer or more expensive home and taking charge of the maintenance themselves, but older homes at lower price points could have ongoing issues with upkeep and repairs.
“Generally speaking, I think it’s good to get home repair insurance or a home warranty for the first year, then drop it,” says Lewis. “If people look at how much it costs to do a repair out of pocket as opposed to the cost of maintaining a home warranty, doing the repairs yourself is usually less.”
She adds that the exception might be when the home in question is old and requires multiple repairs; in that situation, renewing the warranty or home repair insurance isn’t a bad idea.
“It really depends on the buyer, their goals and expectations,” says Lewis. “I’ve sold people homes and something major has gone wrong that first year, and having that extra coverage has made all the difference. It’s not all bad or all good.”
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