Are home warranties worth it?

When Courtney St. Gemme-Chandler and her husband bought an older home in Aurora, Colorado, in 2012, they assumed it would need some minor TLC. But their elation at the closing table soon turned to frustration when the house started falling apart — and repair costs began piling up.

Right after they moved in, a pipe burst under the concrete in the basement. That was followed by a broken dishwasher, a nonfunctioning electrical panel and faulty electrical wiring. Luckily, the couple’s real estate agent had purchased a home warranty for them as a closing gift.

None of these problems had come up during their home inspection. The home warranty, as it turned out, was a fortuitous gift that saved them $2,000 on repair costs.

While homeowners insurance protects your home against unforeseen circumstances, a home warranty, which costs an average of $550 per year, is a convenience program that covers the normal wear and tear on the major mechanical and electrical systems in a house, says Art Chartrand, counsel and administrator of the National Home Service Contract Association. Your home’s heating, ventilating and air-conditioning systems, the water heater, sump pump and kitchen stove are some of the items covered by a home warranty.

Home warranties, also called home service contracts, are nothing new, but more real estate agents have recommended them in recent years as the housing market has been flooded with foreclosures and short sales — properties that were often neglected or poorly maintained.

“A home warranty is like an insurance policy that protects you after the home sale, but you have to pay close attention to what is and isn’t covered,” says Tony Martinez, a real estate agent with Re/Max North San Antonio in San Antonio, Texas. “Do your homework and research companies online, and make sure you document all of your communications with the warranty company and the service technicians they hire on your behalf.”

Read the fine print

Consumers sometimes make the erroneous assumption that a home warranty covers structural defects or insurable incidents normally included in homeowners insurance coverage, such as damage from natural disasters, burglary or fires, Chartrand says. Some also mistakenly believe that the policies function as emergency home service contracts, meaning the problem will be diagnosed and fixed within hours, which isn’t the case.

When you file a claim, your home warranty company chooses a local contractor that’s been vetted and sends it out to diagnose your problem for a set service fee, which you’re responsible for paying. If the contractor doesn’t find an issue or you disagree with the findings, you can ask the warranty company to send a different contractor out to give a second opinion, Chartrand says.

Getting a claim approved comes down to understanding what your policy does and does not cover. Most home warranties expire after a set time period and don’t cover every little thing in your home — think leaky faucets or peeling paint. That puts the onus on you to read your contract and ask questions, says Katherine Hutt, national spokeswoman for the Better Business Bureau.

You might opt for a certain level of coverage based on your home’s size, condition and age. Beware of scammers who might offer a half-price home warranty contract, then disappear when you try to file a claim, Chartrand says. Consumers should be cautious of such offers and research home warranty providers before choosing one.

Negotiate repairs in the home inspection

A home inspection won’t uncover every major problem, but it can lay the groundwork for getting the most from your home warranty.

While Martinez recommends home warranties for his buyers, he also advises them to negotiate major repairs during the home inspection period and ensure regular maintenance of their home’s systems and appliances. Some home warranty companies, for example, won’t cover an air conditioning unit that hasn’t been serviced within a certain time frame; that’s an item worth negotiating with the seller before closing, Martinez says.

Deborah Kearns is a staff writer at NerdWallet, a personal finance website. Email: dkearns@nerdwallet.com. Twitter: @debbie_kearns 

This article was written by NerdWallet and was originally published by USA Today.