Why Home Warranties Aren't All They're Cracked Up to Be

Are home warranties worth it? Maybe not.

Home warranties promise protection against problems that arise in your house that aren't covered by homeowners insurance. For example, warranties may promise to cover you if your appliances, water heater, or furnace break.

These warranties, however, are typically service contracts. They're different from the warranties offered by a builder that come with a brand new home. And they aren't necessarily worth the money you'd pay for them. Here are a few key reasons why.

1. They may provide redundant coverage

If you have a newer home, your home warranty may duplicate coverage you already have. For example, your appliances, water heater, or furnace may already be covered by the manufacturer. If you bought any of these items with a credit card, your card also sometimes extends your warranty coverage. As such, you may have protection even if your appliances are already a few years old.

2. They often come with lots of exclusions

It's common for warranties to come with lots of fine print. For example, they may exclude things such as sprinklers or pools. And they may exclude certain components of covered items such as the tank on your hot water heater. As if that's not enough, they may also specify that they won't pay for repairs when damage occurs under certain circumstances, such as an appliance that was damaged by a power surge.

3. "Replacement" coverage may be based on the depreciated value

Many home warranties specify the company will replace your broken item if repairs are too expensive. Unfortunately, the warranty is unlikely to get you a brand new oven or washer when your old one breaks. Instead, the company will likely cut you a check for the depreciated value of that appliance. This will probably be for far less than the cost of a new item, especially if whatever broke was fairly old.

4. You may have to pay a service fee

Warranty companies often require you to pay a service fee for someone to come out and assess the problem. If it turns out the item isn't covered, this fee is wasted money. And even if the item is covered, the fee may be as much or more than the cost of minor repairs.

5. You can't use your preferred service provider

You'll be locked into using the repair professionals that contract with your warranty company. If they don't have the skills to repair your equipment to your standards, you're out of luck. You'll also need to wait until they have a repair technician to send out, which could take time.

These downsides mean you need to make sure you understand exactly what a warranty does before you buy one. You may just find it makes more sense to avoid paying for a warranty that doesn't cover much and instead use a high-yield savings account to save for home repairs.

You can deposit a small amount of money into the account when you make your monthly mortgage payment. That way, the cash will be there when you need it to make fixes. And you'll be able to use this money to pay for whatever you need, with no exclusions to worry about.