People looking to buy a home frequently find themselves encountering a number of the biggest financial decisions they will ever confront.
Bestselling personal finance author and radio host Dave Ramsey believes potential home purchasers can make one choice easier by simply removing it from the list of considerations.
Besides saving money for down payments and emergency funds for maintenance, people buying real estate are also confronted with closing costs that cover a wide range of obligations.
One key decision is whether to pay for a home warranty. Ramsey has strong feelings on this specific subject.
He suggests beginning by understanding the difference between a home warranty and home insurance.
“While a home warranty covers stuff that breaks, homeowners insurance covers your home (and its contents) if it’s damaged or destroyed by fire, a windstorm, hail or lightning,” Ramsey wrote on his company’s website, Ramsey Solutions. “It also covers theft and vandalism.”
“Homeowners insurance usually covers much bigger losses that the average person can’t afford to fix,” he continued. “It’s also mandatory with most mortgages. And if your home is at risk of being damaged by a flood, an earthquake or a hurricane, you’ll need separate insurance policies for those types of natural disasters.”
Ramsey offers advice on whether to get a home warranty
In a recent interaction with an advice seeker asking about getting a home warranty, the radio host made his opinion clear.
“Dear Dave,” wrote a woman identifying herself as Jodie, according to an email sent to TheStreet from Ramsey Solutions. “Are home warranties a waste of money if you already have a fully-funded emergency fund containing six months, or even more, of expenses set aside?”
Ramsey quickly got to the point when explaining his view on the topic.
“I don’t do extended warranties, because they’re not a good deal,” he wrote. “In my mind, you’re better off to self-insure against damage or things breaking down. That way, you can put what would have been profit and marketing dollars for the extended warranty company in your own pocket.”
“I mean, think about it. If you buy something, but can’t afford to fix it if something goes wrong, it’s not really a smart move to buy it in the first place, is it?” he asked.
Ramsey clarified his thoughts about having a strong emergency fund to cover costs that aren’t necessarily planned.
“I always recommend an emergency fund of three to six months of expenses to cover the unexpected things that life will throw at you,” he wrote. “In most cases, this amount of cash — sitting in a good money market account with check writing privileges — will allow you easy access in the event of unexpected expenses or a financial emergency.”
A man is seen standing in front of a house in a row of them. Personal finance expert Dave Ramsey explains why there is no need to waste money on home warranties.
David McNew/Getty Images
Why a home warranty might not be worth the money
Ramsey offered a few more thoughts on why he believes a home warranty is unnecessary.
“A home warranty isn’t worth it for home buyers or homeowners,” he wrote. “In just about every case, you’ll spend more on the warranty than you would if you just paid for repairs out of pocket.”
“Most home repairs cost less than $500,” he added. “That means you could pay for two or three repairs a year with what you would’ve spent on a warranty premium and service fees. Yes, stuff breaks — that’s just part of homeownership. But you’d have to be pretty unlucky to have three appliances or home systems break in one year.”
The personal finance expert had a simple reminder.
“Remember, a home warranty only covers the cheapest repairs or replacements,” he wrote. “And you still have those added service fees. Warranties are simply a waste of money.”
“It’s better to keep the money you’d spend on a home warranty in your pocket and save it to pay for repairs on your own,” Ramsey wrote. “That way, you can control the whole process and make sure you get appliances that are right for you and your family’s needs.”