Advice from Nashville's Financial Guru Dave Ramsey

Dave Says
By Dave Ramsey
Author of Financial Peace and The Total Money Makeover
8/2/2004

Is it worthwhile to renew home warranty?

Dear Dave,

I bought a house last July and it came with a home warranty. Is it worthwhile to renew that warranty for another year?

Shannon in Louisville, KY



Dear Shannon,

No. You do not buy extended warranties on cars, appliances or homes. Here’s why: 85% of the warranty premium is profit. It’s actually marketing costs. They pay huge commissions to the companies and if they have staff people, it’s profit. The reason is real simple, they run the calculation that if they insure 1,000 homes like yours against the breakdown of the heating and air or water heater or whatever it covers.

 They know about how many times they’re going to have to write a check and what that check is going to be. Out of 1,000 homes, they know it’s going to cost them so much and that’s factored in. So, as long as your home is average or slightly below average, you’ll do better by putting that money you would have paid them into your emergency fund. Because you get to keep it if nothing breaks. It’s just a form of insurance and it doesn’t work in your favor. Otherwise, it wouldn’t be profitable for them. 
-Dave

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