How Home Warranties Work

Life is full of unpleasant surprises. You forget your umbrella at home once – conveniently, that’s the day a stray shower soaks you to the bone. You restart your computer to update it. Eight hours later, it’s still going. You drive your car into a puddle, only to find it’s a bit deeper than expected.

And then, something in your home breaks. Think your homeowner’s insurance has you covered? Think again – it’s only there to protect you against catastrophic loss. When your furnace quits, you’re on your own. Insurers deem anything related to “wear-and-tear” as an expected occurrence, no matter how expensive it may be.

Many Americans struggle to save $400, let alone $3,000. Yet, the latter figure is what you’ll spend on a basic furnace. High-efficiency models, present in many homes, cost far more than that. If this seems like a hopeless situation, take heart – there is a way to simplify and lower home repair costs.

Every year, more people discover home warranties. What are they, and are they right for you? We’ll answer both questions in today’s blog post.

What are home warranties?

A home warranty is a novel concept for most people. That isn’t because we’re out of the loop – they have only become better known recently. Rodney Martin, CEO of America’s Preferred Home Warranty, admitted to the Lasing State Journal that only 4% of American households had them.

Why so few? First, let’s define what a home warranty is. A home warranty covers the cost of home repairs in return for a monthly premium and a deductible. In the past, the average American house was much younger than it is now. Because of this, homeowners didn’t have to make many expensive repairs.

Fast forward to 2019. The average American home is approaching 40 years old. Many of these residences were slapped together in the 70s and 80s. Building standards fell by the wayside, as Baby Boomers tasked overwhelmed builders with the building of tons of homes.

Consequently, these houses are now falling apart. With Americans spending an average of $2,000 per year on maintenance, many are looking for ways to cut costs. That’s why home warranties have suddenly gotten more popular of late. Still confused? This guide explains how it works – give it a look through. 

Where can I find home warranties?

Escalating repair/replacement costs have become an issue nationwide. Accordingly, you’ll be able to find home warranty providers just about everywhere. However, availability varies from state-to-state – population and regulations are just a couple of factors that influence selection.

Texas is home to more home warranty firms than any other state. Forty-four companies sell warranties here, thanks to its business-friendly environment and having a climate that wreaks havoc with homes. The fact that it’s home to 28.8 million people, and that many in the state earn lofty oil & gas incomes doesn’t hurt, either.

On the other end of the scale, you have places like New York State. The Empire State only has 23 home warranty firms operating within its borders. At first glance, this doesn’t make any sense. Why would a state with above-average income and 19.5 million people have such poor choice?

Pound for pound, New York State has some of the strictest regulations in the USA. From workplace safety to consumer protection laws, businesses spend considerable time and money wading through red tape.

Also, 64% of New York State lives in NYC or its metropolitan area. Within city limits, the average property costs $800,000. This stark fact forces many to live in condos and townhouses, rather than single-detached houses.

This situation has dried up the customer pool for home warranty companies, as condo boards maintain common systems like plumbing. As a consequence, only 23 home warranty firms ply their trade in New York State.

Can home warranty firms be found outside America?

This blog’s audience, like many others, is international in scope. In other words, many of you reading this may not be from the USA. Before you go searching for a home warranty, though, know that this industry is uniquely an American phenomenon.

In Canada, the term “home warranty” refers to a homebuilder’s warranty. This policy differs significantly, as it covers new homeowners from defective workmanship, rather than appliance/system repair. In the United Kingdom and Australia, it’s the same story – home warranties are policies that protect against contractor malpractice.

No laws prevent American-style home warranty firms from starting abroad. However, home warranty penetration in the USA is in the single digits. Given these stats, it may be a while before the concept catches on internationally.

Home warranties cover a crucial gap in the insurance market

Don’t misinterpret the above – home warranties aren’t a bad idea. The industry was ahead of its time when American Home Shield, the first home warranty firm, was founded in 1971. Back then, well-built houses constructed before the Second World War dominated streets. Houses built in the 50s were still holding together well.

In other words, the market could barely support a few firms. Today, however, the average home is almost 40 years old. Home repair/replacement bills are surging out of control, even as household finances are already stressed.

People don’t want to choose between heat and groceries. For that reason, home warranties are a novel concept whose time has come. As mentioned in the introduction, homeowner’s insurance doesn’t cover “wear-and-tear” expenses. Home warranty firms are merely picking up the ball that insurers have dropped.

Home warranties don’t work for everyone

As wonderful as they sound, home warranties aren’t a silver bullet solution for all homeowners. These policies protect against significant and unpredictable repair/replacement expenses. If you own a brand-new home, this situation doesn’t apply to you.

All your systems and appliances are in mint condition – they won’t start malfunctioning for years! If by some chance they do, a homebuilder’s or manufacturer’s warranty may cover them. And if not? The repairs you’ll do will be so infrequent that a simple maintenance fund will pay for them.

Don’t think about getting a home warranty until your house is at least ten years old. At this age, repair costs begin to approach the annual cost of a home warranty policy.

Don’t let home repair costs catch you off-guard

Nothing will ruin your day faster than a four-figure expense you weren’t expecting. If you live in an older house, repair costs are a financial time bomb. By signing up for a home warranty, you lose volatility and gain peace of mind.