October 22, 2018

For many large purchases, buyers are given an option to purchase a warranty. Generally priced at a percentage of the original purchase cost, a warranty will pay for repairs or replacement in a variety of situations.

When you buy a car, for instance, an extended warranty may pay for any repairs needed for the first few years of ownership regardless of the origin or extent of the repairs needed.

A home warranty works in much the same way — only with some major caveats. In 1971, American Home Shield reportedly offerd the first home warranty. While a home warranty doesn’t guarantee coverage for every repair, it does serve as a contract to provide repair or replacement of large appliances or home systems that may fail as a result of the normal wear and tear associated with living in the house.

Isn’t This Just Homeowner’s Insurance?

While some may see a home warranty as similar to homeowner’s insurance, they’re actually quite different. Homeowner’s insurance covers your personal belongings in the house and the house itself, including frame, foundation, windows, and other structural components. On the other hand, home warranties cover different issues, including appliance repairs, plumbing issues, electrical systems, and other peripherals that may fail due to everyday use.

Additionally, homeowner’s insurance is mandatory, whereas a home warranty is a purchase you can choose to decline. Many property owners see a home warranty as an unnecessary and perhaps even frivolous. Despite these ideas, it can end up being an excellent investment in some cases.

The Advantages of a Home Warranty

If you own rental property, your tenants will be using the appliances in the home on a daily basis. As the landlord, you’re responsible for any necessary repairs or replacement. The home warranty can offer a faster way to fund those repairs.

If your tenants aren’t respectful of the appliances, you may need to repair or even replace appliances more often than is typical. That can get extremely costly and cut into your rental profits, or even cause you to take a loss. Having a home warranty can help with those frequent repairs, and protect your profits. It can also help mediate any delays stemming from deciding who is responsible for repairs. That can always be figured out after the repairs.

Taking into Account the Drawbacks

Before you purchase a home warranty, you should also understand the downsides. First, check your homeowner’s insurance policy. Some policies already have coverage for major appliances, plumbing, or electrical. If you have that coverage, you don’t need a separate home warranty.

You should also be aware that in some cases, a home warranty only covers the depreciated value of an appliance. This means you may not get the full purchase price back, so you will be stuck with the extra cost to replace the appliance. When combined with the price of the warranty itself, it may not be cost effective.

Understanding what your potential coverage limits and spectrum would be is critical to getting a warranty that will fulfill your needs. Far too often people buy a home warranty only to find out later that it doesn’t cover what they need. That leads to increased cost.

Is It Worth It?

If you’ve just installed new appliances in your property, a home warranty may be worth the investment, provided you understand that the coverage will take care of what you need. Before buying one, however, compare costs across several different companies to ensure that the purchase will be cost-effective based upon your property’s needs.

If you have responsible tenants who treat your property and appliances well, a warranty may be unnecessary. Rather than purchase a home warranty, you can trust that your tenants won’t regularly damage your property. You can therefore simply cover the costs as they occur instead of paying for separate coverage.

For landlords with tenants or may be hard on appliances, you may want to consider purchasing a warranty to help offset the costs of repairs. One possible option is to adjust the monthly rent amount to cover the cost of that warranty. Some tenants may find it convenient to have repairs completed immediately instead of having to wait until you can afford to repair or replace the appliance.

Regardless of the type of tenant you have, compare costs and understand coverage before buying a warranty. That way, you can get the best value for your money.

About the Author: By Andrew Rombach from LendEDU – a consumer education website and online financial product marketplace. We specialize in educating consumers in anything finance!

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