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Many of us aspire to get on the property ladder. While real estate doesn’t always go up, over the long run, it almost always appreciates. However, this investment class isn’t without its responsibilities.
Properties require significant capital inflows. These expenses include mortgage and tax payments, but many of us fail to appreciate how costly maintenance and repairs can be. Some attempt to cut back on the former, only to pay dearly when things break down.
According to the Motley Fool, we spend an average of $4,845 on maintenance and repairs. The median American household income was $61,937 in 2018. In other words, we spend almost 10% of our annual income on repairs & maintenance alone.
That’s a tremendous burden, especially at a time when the price of everything is increasing. If there’s a way to cut costs, we take it. Now, I don’t advise putting off necessary maintenance, as that will only lead to more significant problems later on.
However, there is an intriguing way to streamline and even SAVE on repairs. In today’s post, we’ll talk about home warranties, and whether they’re right for you.
What On Earth Is A Home Warranty?
If you have no clue what a home warranty is, I don’t blame you. When I set out to research this piece, I didn’t either. However, when I came across this concept, I was quickly sold. I mean, we already pool risk to save on catastrophic home and MVA costs – why not do it for home repairs?
But enough about my little Eureka moment. What is a home warranty, anyway? In short, it is a service contract that mimics insurance. Pay a monthly premium, and your home warranty firm will repair/replace your broken systems and appliances. Apart from a small deductible, your home warranty firm partially or fully covers all work.
Whenever something breaks, call your home warranty provider. After confirming they cover your claim, they’ll dispatch the appropriate technician. At this point, you’ll pay a nominal service fee/deductible. Usually, it costs around $75, but YMMV.
How Can A Home Warranty SAVE Me Money?
When it comes to real estate, Millennials have had a tough go of things. We didn’t get wiped out in the Global Financial Crisis like our Boomer/Gen X parents. However, as we’ve struggled to find a decent-paying job, we’ve also struggled to find affordable housing
As a result, many of us opted for cheaper resale homes rather than brand new properties. On the surface, it seemed like a decent way to get on the property ladder. Not ideal, but things could be worse
Well, things got worse. Eventually, we made a startling discovery – most 70s and 80s bungalows are crap. You see, contractors built these homes when Boomers were entering the housing market. At the time, builders couldn’t get them up fast enough. So, they cut corners.
30-40 years later, you’re paying for the shortcuts they took. It’s no accident we spend thousands annually on repairs – the average house is now 38 years old.
All is not lost, though – if you find yourself in this situation, a home warranty could SAVE you money. Now, the annual spending figure we cited in the intro included both maintenance AND repairs. For this example, though, we’re only interested in repair costs.
Usually, you’ll spend between $1,000 to $2,000 annually. However, during years when your furnace dies or electrical fails, this number can spike to something like $4,000-$7,000.
But, let’s assume you spend about $2,000 per year on repairs. The average home warranty firm charges around $600 for comprehensive coverage. If you make three service calls annually ($75 per instance), your annual bill will come out to around $825.
Now, this number doesn’t include coverage cap overages or uncovered repairs. But, with almost $1,200 of wriggle room, it’s not hard to see how home warranties can help you save on repair costs.
Counterpoint: Home Warranties Don’t Always Save Money
So, it’s a settled case, then – home warranties all the way? Not so fast – depending on your situation, you might end up paying MORE. Let’s say you just moved into a new home. It’s so new, you can smell the freshly painted walls.
In this scenario, I DON’T recommend getting a home warranty. First of all, your property is brand new. All your systems and appliances are, barring manufacturer defects, in mint condition. If you perform regular preventative maintenance, they won’t break down for at least a decade.
Secondly, you might already be covered by the manufacturer and/or a home builder’s warranty. The former guarantees your appliances against factory defects, usually for 1-2 years. The latter guarantees the labour on everything from your roof to your foundation. Depending on the policy, they can protect you anywhere from 1-10 years after you move in.
If your home is new/less than ten years old, pass on getting a home warranty. In its place, save up an emergency fund of at least $1,000. Given how young your house is, that should be enough for most repairs.
Home Warranties Can Stabilize Your Household Budget
What if your home isn’t new or old?
If your home is 10-20 years old, your average repair bill will be about the same as a yearly home warranty subscription.
In this case, I would recommend getting one – here’s why.
When major repair bills happen, they can catch you off-balance. Fridges and furnaces don’t care that you’re a week out from payday – when they’ve had enough, they break.
Bad timing like this can plunge you into debt. With a home warranty, you pay the same premium every month. Your service fee is the same for every call. These are numbers you can easily plan for in advance.
Because of this, you won’t have to worry about carrying a big balance at 20% interest. Nor will you have to postpone your annual trip to the Caribbean. In this instance, home warranties = peace of mind.
Tame Your Repair Costs
It feels good to have a place you can call your own. Let’s keep it real, though – homes are money sinks. They are only wealth enhancers on paper – until you sell, they have no real worth.
Until that day, you’re on the hook for mortgage payments, taxes, and repair costs. While you can’t do much about the first two, home warranties can reduce and/or stabilize the last one. At a minimum, they can make those four-figure bills a thing of the past.