If You Can’t Stand the Heat…Buy a Home Warranty?

Money-Guy 06-10-2011

Home warranties are most commonly associated with the acts of buying or selling a house.  But often times, they make sense for those of us who are too busy (or simply not handy enough) to do our own repairs around the house.  Today’s show is focused on some of the advantages of home warranties, as well as some things to look out for.

People often ask me how I come up with topics for this podcast and I usually say that life has a funny way of constantly providing content.  This happened about a week ago, when I came home to a broken air conditioning unit in this sweltering weather we have been experiencing in the South.  I immediately contacted my home warranty company to send someone to fix the issue.

There are a couple of reasons I decided to purchase a home warranty awhile back.  First of all, I am not handy.  It is actually considered an accomplishment if I replace a light bulb in my house.  So the home warranty provides me with the convenience of knowing who to contact with issues that I can’t fix.  Another reason I like the home warranty is that I can be confident that the person doing the work for me won’t try to rip me off with recommendations.  I pay $500 per year for my warranty and a $60 co-pay each time I need service.  If someone tells me I need a whole new air conditioning unit, I know it is not an effort to make more money off of me because I only pay the $60 no matter what the fix is.  These are some reasons that the home warranty has been extremely beneficial for me, but they only make sense for some people.

Liz Weston wrote an article for MSN Money about home warranties and things you should be careful of if you are looking to purchase one:

• The contracts come with loopholes – “Pre-existing” problems are usually not covered, nor are issues that occur due to poor maintenance or improper installation.  Make sure to read the service agreement carefully and know what is and is not covered.

• Regulation is spotty – Many states do not supervise home warranty companies at all.  Try to pick a company that has a long track history and solid financials.

• You don’t have control over who does the work – The home warranty company chooses the service technician, not you.  In my recent air conditioning ordeal, the technician actually did not ever show up.  Luckily, my home warranty provider made things right by allowing me to hire someone on my own, but that may not always be the case.

• Home warranty companies often favor repair over replacement – While repairs are usually cheaper for the company, they may not be the wisest choice and can provide you with further problems in the future.

So, when do home warranties make sense?  Usually when you first buy a home, if you’re trying to sell a home, if your home is aging, or if you are simply not handy like me!  Another reminder is that you should not consider your home warranty a replacement for an emergency fund.  Because not all repairs will be covered, you still need savings for those emergencies.

To close the show, we share some ‘Biggest Money Mistakes’ that individuals posted on CNNMoney.com.  These include:

• Purchasing a vacation home as an investment

• Keeping too much money in employer company stock

• Trusting an advisor’s pick and ignoring large fund fees

• Being too risk-averse for a young person

• Putting short-term savings into growth stocks

• Panicking when the market plunged

• Chasing hot stocks

• Failing to rebalance

We want to hear your experiences with home warranties as well as your biggest money mistakes!  Please leave some feedback on our website as well as our Facebook page!