Should you get a personal loan to cover the cost of a home warranty? Are home warranties worth the money? What do they cover? What are their pros and cons? And what should you do if don’t have one but face unaffordable emergency repairs? Read on to find out …
What is a home warranty?
People will tell you that a home warranty isn’t a form of insurance. And it isn’t. Except when it is.
So, just like with insurance, lots of people pay into a pot and stand to receive a benefit if a risk that’s covered arises. And you often have to pay “deductibles” (service call charges), just like with insurance. And the company you deal with is likely to have many exclusion clauses that it applies strictly — just like with insurance.
But, technically, a home warranty is a service contract. It sits alongside your homeowner’s insurance policy and covers different risks. And it’s very definitely not insurance when it comes to the laws and regulations that govern it.
How does a home warranty work?
For a typical property, a home warranty comes in at between $350 and $600 a year. Of course, that can be much higher if you want coverage for atypical amenities such as a swimming pool. And you may find that you have to pay extra if you want to cover high-end major appliances in your kitchen.
That basic annual fee should cover the main systems in your home: things like HVAC, your furnace, your water tank and so on. And those can be ruinously expensive to repair or replace. Even if you pay that top-end $600 annual fee, you’ll be delighted if your home warranty saves you close to 10-times that much for a replacement HVAC system.
You normally use your home warranty by calling your provider’s service department, and they dispatch a repair technician. Pretty simple. You pay the service fee when the technician arrives and your item is repaired or replaced at usually no extra charge.
Pros of a home warranty
The good news: most U.S. adults are satisfied with their home warranty policies, according to a home warranty survey conducted by Reviews.com in August 2019.
The right home warranty can protect you from emergency situations you can’t easily afford. For instance, if your furnace dies in the dead of winter to the tune of $3,000, and you can’t afford the repair / replacement, the consequences could be very unhealthy. The same goes for air conditioning emergencies during a heat wave (because when else does air conditioning ever break down?) or plumbing catastrophes any time.
With luck, you won’t have to claim under your warranty often or at all. Just like with insurance, claims usually involve some sort of drama that you’d rather avoid. But — again, just like with insurance — what you’re really buying is peace of mind.
Cons of a warranty
Consumer Reports isn’t a big fan of home warranties. It says:
Consumer Reports has long recommended that consumers put the money they would otherwise spend on a home warranty or a service contract into a savings account dedicated to product repair and replacement. Or you could stash additional money for those costs in your general emergency fund. Either way, you won’t risk paying for a plan that may not provide the coverage you expect.
That’s great advice. But in the real world, we might encounter an emergency before we’ve stashed away a few thousand dollars to cover a costly home repair. What are we supposed to do when we face an expensive repair bill?
Be careful about the company you select and read the coverage to avoid misunderstandings. Here’s what to look out for.
- Exclusion clauses — Some risks may be excluded. To be covered, for example, your HVAC system might have to be serviced and maintained in accordance with the manufacturer’s recommendations
- Coverage variations — You need to read the small print in your warranty before you buy. Some are fair but others cover very little and exclude a lot. Don’t wait until you make a claim to discover which sort yours is
- Replacement or depreciated value — Some warranties cover in full the replacement of a part or whole system. But some will pay only the current, depreciated value of that part or system, which could be very low. And then you’d have to come up with the difference
- Service call fees — These vary. You can pay as little as $60. Or as much as $125. Think of these as an insurance deductible
- Quality variations — There are some excellent home warranty companies. But some are plain bad. Make sure you find one that delivers a quality service and that pays out when required. So check the Better Business Bureau website and read online reviews
The message here isn’t to avoid all home warranties. It’s to take care when you’re picking yours.
Best home warranty companies
This list is the result of a search of many online reviews as well as personal interviews with real estate agents and homeowners. You can feel safe with these top five providers. Just compare rates, fees and coverage and choose the one that meets your needs. Some people just want to know they won’t be broken by an expensive disaster, while others expect to use the warrant for most repairs.
Choice Home Warranty offers a 90-day repair guarantee. Their pricing is competitive and you can choose between a basic and complete plan. And optional coverage lets you include specific items not covered by the two packages.
American Home Shield
American Home Shield offers three plans covering 11 systems and 10 appliances. Flexibility and the quality of repairs makes the company stand out. Their skilled technicians advise you about repair or replacement and their customer service is top-rated.
Select Home Warranty
Select Home Warranty sends professional technicians to complete your repairs or replacement and the service fee is low.
It’s easy to start a claim with one phone call.
First American Home Warranty
First American Home Warranty offers custom plan options and licensed technicians like other top providers. What’s special is that they offer repairs 24 hours a day and 7 days a week.
America’s 1st Choice Home Club
America’s 1st Choice Home Club offers three separate plans and an additional coverage option. What makes them different is that when you sell your home, buyers can take over your policy, giving you perhaps a competitive advantage.
Home warranty loan
Many people buy their first home warranty when they buy their first home or move to an older one. And that’s often a time of real financial strain.
So does it make sense to get a home warranty loan? And, if so, what sort of borrowing is best?
The answer to that will depend on how much you’re borrowing and for how long. If it’s a modest amount that you’re certain you’re going to pay down within two or three months, your credit card should do fine. Sure, the interest rate is extortionate. But you can probably live with that over such a brief time.
Personal loan for a home warranty
But, if you’d rather spread your payment over, say, a year, a personal loan for a home warranty might be better. The interest rate is likely lower. Setting one up usually takes just a few minutes online, and you often get the money the next working day. Alternatively, you can charge the cost to your credit card (so you still get rewards) and then pay it down from your loan.
One warning: Don’t borrow anything (including this) in the run-up to closing on your home purchase. Lenders routinely pull new credit reports in those final days. And a new account or a higher credit card balance is likely to adversely affect your credit score, putting at risk your mortgage deal.
Home emergency loan
If you get caught without emergency savings or a home warranty, what can you do if an emergency home repair comes up? You can always borrow to cover the repair. If you have unused credit on your credit cards or a line of credit, you may be able to use that to cover your repair.
If the cost is higher than you can pay off in a couple of months, you may want to get a personal loan at a lower interest rate and spread out the repayment over a longer time wit a fixed interest rate. It can make sense, especially if you also consolidate credit card debt and perhaps take care of a few other items at the same time.
One loan can have multiple benefits.