What Is a Home Warranty?
A home warranty is a contract between you and a provider that covers repair costs on certain essential systems (e.g., electrical, plumbing, and HVAC) as well as certain appliances in your home (e.g., refrigerators, stoves, washers, and dryers). When one of your covered systems or appliances breaks, you file a claim, and your home warranty will send a technician to diagnose the issue. If it is a covered failure, your home warranty can help pay for the repair or replacement of the system or appliance.
What’s Covered by a Home Warranty?
Systems and appliances have lifespans–they break down, wear out, and eventually stop working. A home warranty kicks-in when a covered system or appliance fails from old age (i.e., normal wear and tear). A home warranty covers systems and appliances listed in the contract. These contracts can include about every system and appliance in your home—from stand-alone ice makers and jetted bathtub motors to sump pumps and septic tanks; they can also be tailored to cover only what you need (e.g., systems-only plans or appliance-only plans).
What’s Not Covered by a Home Warranty?
There are certain things that a home warranty will not cover, such as pre-existing problems, cosmetic defects, as well as items covered by homeowners' insurance. Any damage or malfunction due to neglect, misuse, or natural disasters is typically not covered.
Home warranty providers expect you to take care of your appliances and systems or they may deny your claim for neglecting normal maintenance. Home warranties do not cover secondary damage caused by a covered malfunction. For example, if your dishwasher floods the kitchen and discolors the hardwood floors, the warranty will not cover the damage to the floor.
What is the Difference Between a Home Warranty and Home Insurance?
There are too many differences to list, but here are two of which you should be aware.
- While home insurance is almost always required as a condition of obtaining a mortgage, a home warranty is entirely optional.
- Home warranties cover normal wear-and-tear on certain appliances and systems; home insurance covers unexpected events that lead to home damage.
How Much Does a Home Warranty Cost?
The cost of a home warranty varies by company and plan level coverage. On average, you can expect to pay about $600 annually for a home warranty or about $50 a month. However, this price does not include service fees, which can range from an additional $50 up to several hundred dollars, depending on the system or appliance being serviced. Home warranties also typically specify a replacement cost limit for covered items. That cost depends on the specific home warranty plan. For example, if a company only pays up to $2,000 for an appliance, you might be forced to choose a cheaper model or pay the difference out of pocket. Read the fine print of your plan carefully to ensure you understand what fiscal responsibility you will have if a covered system or appliance fails.
When Is a Home Warranty Worth It?
Home warranty coverage can minimize the expense of fixing or replacing big-ticket items for which you might not have saved money. If you own a home or are considering buying a home, you may benefit from a home warranty if:
- You are purchasing an older home.
- You have older appliances.
- You do not have an emergency fund for unexpected malfunctions.
- You do not feel confident that you can fix your home systems on your own when they break.
- You do not want to be responsible for finding a contractor to fix failures.
If you are purchasing a new construction home or if your appliances are still covered by a manufacturer’s warranty, you may not benefit from a home warranty. Moreover, if you like working with a specific repair company, a home warranty may not be for you. Warranty providers typically do not let homeowners pick diagnostic/repair providers.
The Bottom Line…
A home warranty can be extremely valuable under the right circumstances, but you must do your homework. Home warranty scams exist and often end up hurting the most vulnerable consumers.