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Is a Home Warranty a Good Investment?

Read the fine print before you buy

If there is a disagreement between the consumer and the warranty company, Griffith says the first step is to contact the company. The company should review the homeowner's case and respond in writing. If the response is negative, the next step is legal mediation. If the results of mediation are still unsatisactory, consumers could then go to the regulatory body in their state that oversees home warranty firms. In some cases that may be the state's real estate commission; in others it may be the state insurance regulator or attorney general's office.

Under most plans, the homeowner is also responsible for various out-of-pocket expenses in addition to copayments, for things like haul-away and disposal fees, work permits, corrections of code violations found during service, sales tax for new equipment, and refrigerant recovery and disposal. When it comes to copayments, it's important to realize that you are responsible for a new copay every time a contractor comes to your house, meaning you pay a copay for each call by a tradesman (e.g., plumbing, electrical, appliance, HVAC, etc.). This can add up to a large copay amount if a problem affects multiple systems. And since copays are usually in the $60 range, it doesn't make sense to file a claim for simple do-it-yourself repairs where the materials for the fix may cost only a few dollars.

It's also important to understand the warranty provider's responsibilities — or lack of them — for restoring items to their original condition. For example, when it's necessary to open walls, ceilings or floors for repairs, home warranties generally provide for restoring those surfaces to a rough finish only, meaning the finish work will be at your expense.

"The contractor will not restore walls, floors, tile, masonry, marble, wall coverings, cabinets, or similar items to their original condition. In some cases, you may be required to provide access," according to a brochure from Nations Home Warranty.

When replacing appliances, most policies say they are not responsible for matching color, brands or the same level of energy efficiency (e.g., Energy Star-rated), unless you pay for additional coverage. In general, the warranty company has sole authority when it comes to which contractors are hired, whether an item is repaired or replaced, and what materials are used to complete a job.

The Benefits of a Warranty

OK, you get the idea: Do your homework and read all the fine print so at least you know what you're getting before committing. Home warranties generally are not a good investment for a newly constructed home, as many come with a builder-backed warranty. When purchasing an older home, it's not uncommon to ask for — and receive — a one-year home warranty plan paid for by the seller; that will provide you with at least some protection if you just closed on a very ripe lemon and gives you a chance to see if a home warranty is right for you.

You should always have a house inspected by a licensed professional inspector before you buy, rather than simply rely on a home warranty to protect your investment after you already own it.

A home warranty can save you money if you need a major repair and it's covered. Also, with a home warranty, one phone call may solve all your problems, avoiding the hassle of finding qualified contractors. And many people purchase home warranties primarily for the peace of mind they provide, which is one reason why, according to OneGuard Home Warranties, the industry average renewal rate for home warranties is nearly 40 percent.

And if you're a homeowner who is "mechanically challenged" when it comes to doing even the simplest home repairs, it may be more cost-effective to invest in a warranty instead of trying to fix things yourself and then paying a pro to do the job right.

Jeff Yeager is the author of four books, including How to Retire the Cheapskate Way and The Cheapskate Next Door. You can follow him on Facebook and Twitter.

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