Congratulations on the new home!
But hang on. The garbage disposal isn’t working as it should. The hot water doesn’t seem to be hot anymore. A home warranty can ease the headaches and financial strain of fixing or replacing appliances and home systems, but any contract will require much more than a glance.
A policy can be purchased directly from a home warranty company at any time, not just upon a move-in. In some cases, the seller may provide a home warranty with the sale of the home.
Home warranties can help protect new homeowners and existing owners from troubles here and there, but is a home warranty really worth it?
Related: 6 simple ways to reduce a mortgage payment
What Exactly Is a Home Warranty?
A home warranty—different from homeowners insurance—covers specific items such as home systems (things like the HVAC system), washers and dryers, kitchen appliances, pool equipment, garbage disposals and exposed electrical work.
Homeowners insurance covers theft and damage to a home from perils like fire, wind and lightning strikes. While homeowners insurance is typically required by a mortgage company, home warranties are optional.
Price of a Home Warranty
The cost of a home warranty can range from about $350 to $600 a year or more for coverage for items not on the stock home warranty list. Extras may include pool systems and septic systems. Those who purchase a home warranty will pay that annual premium, but if they do call in a service provider, they will likely have to pay a fee for service calls, too.
Depending on the extent of the issue, the service call may cost anywhere from $60 to $125.
Pros of a Home Warranty
While the above fee may seem like a lot, the real pro of having a home warranty is it could save a homeowner a bundle on repairs in the future. HomeAdvisor reports that the average national cost to replace central air conditioning is $5,750 and that a new water heater can average $1,160. Both of these items would likely be covered under a home warranty.
Another benefit of a home warranty is pure convenience. If something breaks, a homeowner calls the warranty company, which will likely have a list of technicians at the ready. This means homeowners won’t have to spend time researching and vetting the right people for a repair or replacement. As the saying goes, time is money.
Then there’s resale value. When selling a home, homeowners with a home warranty may be able to transfer the warranty to the new owner, which could be a bargaining chip for those attempting to sell an older home. (Some home warranties are non-transferable, so it’s up to sellers to do their due diligence when adding this to the deal.)
Cons of a Home Warranty
A downside of a home warranty is that it can be complicated to understand. That’s why it’s up to every purchaser to carefully read the contract before signing and ask all the questions they need to in order to understand the warranty. For example, a home warranty may come with a financial limit per repair or per year. So if someone ends up having one heck of a year with the appliances, some of those repairs may not be covered.
You may need to request additional coverage for appliances that are considered optional or replaced frequently. And will your Sub-Zero fridge and Wolf range be covered if they go kaput? (Not likely.) Most warranty companies list excluded items on their sample contracts.
Ask: Will the plan repair or replace a broken item? If a repair is considered too expensive, the provider might offer to replace the broken item—but give you only the depreciated value.
Claims can also be denied by the warranty company for a variety of reasons, including if it believes an appliance hasn’t properly been maintained. The warranty company can also ultimately decide if a problem is worth fixing or not, despite how the homeowner feels about the situation.
Home warranties also cannot guarantee timeliness. If something breaks, homeowners may have to wait longer than they’d like to get it fixed.
Home warranties will also likely not cover preexisting conditions. If a person moves into a home with a termite problem, the warranty will likely not cover the cost to repair issues. Before you sign the warranty, the company will probably come inspect all the items covered and could deny coverage for certain items.
Choosing the Right Home Warranty
This really comes down to personal choice and research. It’s important to look into each contract to see what is covered, what isn’t, the cost of services and more. While searching the internet for the right home warranty, it may be best to go beyond online reviews. Rather than looking on public listings, head over to websites like the Better Business Bureau and search for individual companies.
There, would-be home warranty buyers can search for companies to read the vetted reviews, alongside any potential complaints.
Is a Home Warranty Really Worth It?
A home warranty could be the right call for people who are not up for having to perform repairs themselves or don’t have time to hire technicians.
For those buying a new construction, a home warranty may likely be unnecessary as many newer homes come with some type of guarantee. That and because everything is newer, it may be less likely to break early on. Individual appliances may also come with their own warranties, so make sure to check each one to see if it’s still protected before spending extra money on it with a home warranty.
One more way to figure out if a home warranty is worth it is to check out the home’s inspection report. If there are red flags about a home’s condition, it may be a good idea to purchase a home warranty to cover any additional expenses that crop up.
Alternatives to Home Warranties
If homeowners are worried about protecting their investment but aren’t sure a home warranty is right for them, there is an alternative: Build up an emergency fund. Homeowners can start stashing away cash into an emergency savings fund that they can dip into whenever they need repairs done. This acts as their own “home warranty” without having to pay a premium to a company.
To take it one step further, homeowners could also create a spreadsheet with the names of repair workers when they need something fixed.
The Takeaway
Are home warranties worth it? Anyone looking into purchasing one will want to take a close look at the annual cost, the charge for service calls, exactly what is and isn’t included, and how much of a replacement item is covered.
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Understanding mortgage basics
Do you ever window shop for the perfect home, whether by browsing online or taking a stroll through your favorite neighborhood? You’re not alone. It’s fun to dream about owning a place all your own.
If you’re getting more serious about buying a home, you’re probably aware that some of the next steps are, well, not quite as fun. One of those is acquainting yourself with the mortgage process.
A mortgage loan, a loan to buy a home or other real estate, provides people with the opportunity to purchase a home without having all the money upfront—which most people simply do not have.
While it is wonderful that mortgage loans open up homeownership to so many, taking out a mortgage is also a big responsibility. This home affordability calculator estimates what might be in your budget.
Taking the time to learn about mortgages before you dive headfirst into the buying process may be the way to go.
Related: What is mortgage amortization?
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A mortgage loan, also known simply as a mortgage, is issued to a borrower who is either buying or refinancing real estate.
The borrower signs a legal agreement that gives the lender the ability to take ownership of the property if the loan holder doesn’t make payments according to the agreed-upon terms.
The homebuyer will pay monthly principal and interest payments for a specific term. The most common term for a fixed-rate mortgage is 30 years, but terms of 20, 15, and even 10 years are available.
A shorter term translates to a higher monthly payment but lower total interest costs.
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When homebuyers apply for a loan, they’ll need to choose whether they want a fixed interest rate or an adjustable rate and the length of the loan.
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The interest rate doesn’t change, so the monthly principal and interest payment remains the same for the life of the loan.
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With an ARM, the interest rate is generally fixed for an initial period of time, such as five, seven, or 10 years, and then switches to a variable rate of interest. The rate fluctuates with the rate index that it’s tied to.
As the rate changes, monthly payments may increase or decrease. These loans generally have yearly and lifetime interest rate caps that limit how high the variable rate can adjust to.
Next, borrowers will need to decide what type of mortgage loan works best for them.
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Conventional loans are loans that are not backed by a government agency, aand must adhere to the requirements of Fannie Mae, Freddie Mac, or other investors.
Private mortgage insurance commonly known as PMI, is generally required on loans with a down payment of less than 20%.
The coverage protects the lender against the risk of default. Your mortgage servicer must cancel your PMI when the mortgage balance reaches 78% of the home’s value or when the mortgage hits the halfway point of the loan term, if you’re in good standing.
PMI typically costs 0.5% to 1% of the loan amount per year.
Down payment: Generally between 3% and 20% of the purchase price or appraised value of the home, depending on the lender’s requirements.
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Loans insured by the Federal Housing Authority are attractive to first-time homebuyers or those who struggle to meet the minimum requirements for a conventional loan.
These loans usually require a one-time upfront mortgage insurance premium, which typically can be added to the mortgage, and an annual insurance premium, which is collected in monthly installments for the life of the loan in most cases.
Down payment: Starts at 3.5%
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Loans guaranteed by the U.S Department of Veterans Affairs are available to veterans, active-duty service members, and eligible surviving spouses.
VA-backed loans require a one-time “VA funding fee,” which can be rolled into the loan.
The fee is based on a percentage of the loan amount, and may be waived for certain disabled vets.
Down payment: None for nearly 90% of VA-backed home loans.
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There are several components to a monthly mortgage payment.
- Principal: The principal is the value of the loan. The portion of the payment made toward the principal reduces how much a borrower owes on the loan.
- Interest: Each month, interest will be factored into payments according to an amortization schedule. Even though a borrower’s fixed payment may stay the same over the course of the loan, the amount allocated toward interest generally decreases over time while the portion allocated to principal increases.
- Taxes: To ensure that a borrower makes annual property tax payments, a lender collects monthly property taxes with the monthly mortgage payment. This money is kept in an escrow account until the property tax bill is due, and the lender will make the property tax payment at that time.
- Homeowners insurance: Mortgage lenders require evidence of homeowners insurance, which can cover damage from catastrophes such as fire and storms. Similar to property taxes, most lenders collect the insurance premiums as part of the monthly payment and pay for the annual insurance premium out of an escrow account. Depending on your property location, you may have to add flood, wind, or other additional insurance.
- Mortgage insurance: When a borrower presents a down payment of less than 20% of the value of the home, mortgage lenders typically require private mortgage insurance.
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A reverse mortgage homeowners 62 and older to supplement their income or pay for health care expenses by tapping into their home equity.
The loan can come in the form of a lump-sum payment, monthly payments, a line of credit, or a combination, usually tax-free. Interest accrues on the loan balance, but no payments are required. When a borrower dies, sells the property, or moves out permanently, the loan must be repaid entirely.
The fees for an FHA-insured home equity conversion mortgage, by far the most common type of reverse mortgage, can add up:
- An initial mortgage insurance premium of 2% and an annual MIP that equals 0.5% of the outstanding mortgage balance
- Third-party charges for closing costs
- Loan origination fee
- Loan servicing fees
You can pay for most of the costs of the loan from the proceeds, which will reduce the net loan amount available to you.
You remain responsible for property taxes, homeowners insurance, utilities, maintenance and other expenses.
This HUD site details all the criteria for borrowers, financial requirements, eligible property types, and how to find an HECM counselor, a mandatory step.
If you’re considering a reverse mortgage, learn as much as you can about this often complicated kind of mortgage before talking to a counselor or lender, the Federal Trade Commission advises.
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For lots of folks, it can be a good idea to shop around to get an idea of what is out there.
Not only will you need to choose the lender, but you’ll need to decide on the length of the loan, whether to go with a fixed or variable interest rate, and weigh the applicable loan fees.
The first step is to have an idea of what you want, then seek out quotes from a few lenders. That way, you can do a side-by-side comparison of the loans.
Once you’ve selected a few lenders to get started with, the next step is to get prequalified for a loan. Based on a limited amount of information, a lender will estimate how much it is willing to lend you.
When you’re serious about taking out a mortgage loan and putting an offer on a house, the next step is to get preapproved with a lender.
During the preapproval process, the lender will take a closer look at your finances, including your credit, employment, income, and assets to determine exactly what you qualify for. Once you’re preapproved, you’re likely to be considered a more serious buyer by home sellers.
When shopping around for a mortgage, it can be a good idea to consider the overall cost of the mortgage and any fees.
For example, some lenders may charge an origination fee for creating the loan, or a prepayment penalty if you want to pay back the loan ahead of schedule. There may also be fees to third parties that provide information or services required to process, approve, and close your loan.
To compare the true cost of two or more mortgage loans, it’s best to look at the annual percentage rate, or APR, not just the interest rate.
The interest rate is the rate used to calculate your monthly payment, but the APR is an approximation of all of the costs associated with a loan, including the interest rate and other fees, expressed as a percentage. The APR makes it easier to compare the total cost of a loan across different offerings.
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Is the world of mortgages a mystery? You’re in good company. Before taking on this colossal commitment, it might be best to soak up as much as you can about how mortgage loans work, what kinds of mortgages are available, potential landmines, and steps to qualify.
Learn More:
This article
originally appeared on SoFi.comand was
syndicated by MediaFeed.org
.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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