What is a home warranty?

A home warranty is an annual service contract that helps cover repair or replacement costs for major home systems and appliances that fail due to normal wear and tear. But they don’t cover everything, and they are different from homeowners insurance and maintenance plans.

Exactly what is a home warranty, and how much does it cost? Who pays for a home warranty? What are the pros and cons? And what are the differences between a home warranty and home insurance? For answers to these and other important questions, read on.

Key takeaways:

• Often costing less than $900 a year, a home warranty is an optional service contract that helps cover the costs of repairing or replacing major home appliances and systems that fail or are damaged due to typical wear and tear.
• Policies offer peace of mind and predictable costs, but they also have limitations like required service fees per visit, limited payout caps, strict claim denial criteria, and no control over who performs the repairs.
• Home warranties are commonly offered by sellers and builders during real estate transactions or can be purchased out-of-pocket by buyers.

What is a home warranty?

A home warranty is a service contract for your home’s major built-in systems and appliances. If these fail due to normal wear and tear during the warranty period, the home warranty can help repair or replace them.

American Home Shield, Choice Home Warranty, America’s 1st Choice Home Club, First American Home Warranty, and Select Home Warranty are all popular home warranty providers.

Types of home warranty plans

The most common types of home warranty plans include:

Home warranty vs. home insurance

Home warranties and homeowners insurance are not the same. The latter helps protect you against liability and catastrophic physical damage to your home’s structure and belongings caused by events like fires, storms, or theft. The former helps cover the expenses of repairing mechanical failures and aging components of a home’s internal systems and appliances caused by regular wear and tear. Home warranties are optional, while homeowners insurance is typically required by your mortgage lender if you’re financing your property.

A home warranty “also is not a concierge service, maintenance agreement, or guarantee that every malfunctioning item will be replaced. And it’s not a promise of perfect service. It is a financial tool that can reduce the cost of an unexpected failure,” says Scottsdale, Arizona-based REALTOR® Denise van den Bossche.

How does a home warranty work?

Here are the common steps involved when you need to submit a claim to your home warranty company:

1. File a claim. Contact your home warranty provider to report an issue with your home appliance or system.
2. Schedule a technician visit. Book a time for a technician to visit and diagnose the problem. This typically requires paying a separate service fee.
3. Wait for the claim to be processed. The home warranty provider will evaluate the claim based on the technician’s review and determine if it’s fully or partially covered.
4. Have the item repaired or replaced. If your claim is approved, the repair will proceed. In some cases, you may receive a new or refurbished replacement. Note that covered repairs or replacements are paid up to particular plan limits.

Do home warranties have deductibles?

Home warranty plans typically only charge a service fee; they don’t also charge a separate deductible, as insurance plans do. However, with home warranties, the terms “service fee” and “deductible” are interchangeable and mean the same thing.

Service fees typically span from $75 to $125; your fee is paid every time you have a service call for a repair or replacement.

How much does a home warranty cost?

Expect to pay between $222 and $1,877 annually, or an average of $866, for a home warranty policy premium. Be aware that home warranty premiums are based on many factors, including the type of coverage, service fees, add-on coverage, and the home’s type, size, and location.

Monthly fees

If you opt for monthly payments, count on paying around $85, on average. It’s often cheaper to pay annually than monthly.

Service fees

Again, service fees tend to range from $75 to $125. You’ll pay this fee every time a service technician is called out for a particular claim.

What does a home warranty cover?

A home warranty plan typically covers home systems and appliances; in some cases, the warranty provider may offer add-on coverage for items like pools and spas.

Home systems

• HVAC systems
• Water heaters
• Electrical systems
• Plumbing systems
• Ductwork (where applicable)

Appliances

• Oven
• Dishwasher
• Refrigerator
• Washer
• Dryer
• Garbage disposal
• Garage door opener
• Ceiling fans (where appropriate)

Optional add-ons

Some providers offer add-on coverage that may apply to your:

• Swimming pool
• Spa
• Septic system
• Roof

What’s not covered by a home warranty?

A home warranty generally doesn’t cover your home’s structure, foundation, walls, finishes, or overall quality, unless it’s a new home protected by a home builder’s warranty. Additionally, natural disasters, neglect, misuse, preexisting conditions, and certain components are usually excluded.

Keep in mind that a home warranty is not the same as a maintenance plan. The latter may be offered directly by local service companies – such as your HVAC contractor, which you can pay to maintain your furnace every year, for example.

Common exclusions

Other common items not covered by a home warranty can include:

• Wells
• Septic tanks
• Solar panels
• Sprinkler systems
• Pools

Why a home warranty claim might be denied

Lack of upkeep, misuse, preexisting conditions, and plan limits related to your appliances, systems, and components can cause your claim to be rejected.

Home warranty coverage limits and red flags

Your home warranty plan may provide narrower benefits than you anticipate. Let’s cover some of these limitations in more detail so that you know what to expect before signing a plan contract.

Common home warranty red flags

Your plan may have unclear coverage terms, high service fees or deductibles, low coverage ceilings, strict exclusions, limited claim approval conditions, and a narrow list of service provider choices. Look carefully at the fine print on the warranty plan paperwork before signing.

Advantages and disadvantages of a home warranty

Consider the pros and cons of a home warranty before you buy one.

Pros

• Predictable cost: You pay a monthly premium that covers regular wear and tear on home systems and appliances, which can minimize major costs from unexpected repairs.
• All-in-one maintenance solution: Instead of shopping for different contractors, you can call your home warranty provider anytime an issue arises.
• Peace of mind: Rest easier knowing that if anything happens to your home systems or appliances, your warranty will help cover the cost.

Cons

• Limited coverage: Home warranty coverage is often capped at a strict dollar amount and may exclude certain issues.
• Service fees: You’ll need to pay a service fee or deductible anytime a technician visits or works on your home.
• Denied claims: The warranty provider may contest or reject your claim if you don’t meet the criteria for coverage.
• Fewer service provider options: You don’t get to choose which service providers work on your home. The home warranty company does.

“Warranty providers generally use approved contractors who agree to negotiated labor rates and service procedures. Homeowners may, therefore, have less control over which company performs the work or how quickly an appointment is available,” says van den Bossche. “In some cases, the warranty provider may offer a cash payment or buyout. This allows the homeowner to hire an outside contractor or apply the approved amount toward replacement. In my experience, HVAC buyout amounts have sometimes ranged from approximately $1,000 to $1,500, although amounts and eligibility vary substantially by provider, policy, diagnosis, and equipment.”

Are home warranties worth the cost?

Home warranties can be worth it if you desire the peace of mind they offer. Let’s explore why and when you should think twice before getting one.

When a home warranty might save you money

If you’re a first-time home buyer, you may want a home warranty to protect your investment and reduce the risk of a major repair bill in the future.

Additionally, a home warranty can be especially beneficial during the first year after purchasing a resale home.

“Buyers may know the approximate age of the air conditioning systems and appliances, but they cannot always predict when one will fail,” adds van den Bossche. “If an older HVAC system, water heater, or high-end appliance such as a Sub-Zero refrigerator stopped working, warranty coverage may significantly reduce the homeowner’s out-of-pocket expense. The policy can also protect against problems that were not apparent or urgent at the time of purchase but later become costly.”

When a home warranty might not be worth it

Then again, this investment may not be worth the cost if your systems and appliances are already covered under new or extended manufacturer warranties, if you have ample savings set aside to handle out-of-pocket repairs, or if you want to select your own service contractors rather than be forced to use the warranty company’s chosen technicians.

Also, limited coverage, denied claims, plan limits, and service fees can reduce the value of your home warranty plan.

What is a home warranty in real estate?

Home warranties can be used during real estate transactions, too. These types include seller-offered warranties and builder-offered warranties, which can be thrown in to sweeten the deal and help convince a home shopper to purchase the property. There are also buyer-purchased warranties, which can help the purchaser more smoothly transition to ownership as they get better acquainted with the house.

Who pays for a home warranty?

Home warranties can be offered by and paid for by sellers or new home builders, or they can be purchased out-of-pocket by buyers, depending on the transaction.

“Sellers sometimes purchase a 1-year warranty to make their property more attractive or to reduce concerns about an older furnace or appliances,” says Daniel Amodeo, president of Amo Realty in Boston. “In many transactions, the seller pays for the first year as part of negotiations, although either party can purchase one.”

Is a home warranty required when buying a house?

All home warranties are optional. Homeowners insurance, on the other hand, is typically required when you’re financing the purchase with a mortgage lender.

What to look for in a home warranty plan

As a homeowner, you have many home warranty providers to choose from. Consider the type of coverage you need, then compare providers and policies.

Thoroughly review the following when considering any home warranty policy:

• What’s covered. Review policy terms to understand any exclusions that may apply.
• Coverage limits. Make sure you know what the maximum coverage amount is per claim.
• Customer reviews. Read online reviews and ratings from past and current customers.
• Servicing fees. Understand how much you’ll pay for each service event.
• Add-ons. Explore add-on options and whether they’re worth the extra protection.
• Exclusions and denial conditions. Know what can cause your claim to get denied.
• Contract terms. Read the fine print carefully to ensure you fully understand the policy.

Also, obtain and compare multiple quotes before choosing a home warranty plan.

Questions to ask before buying a home warranty

Take the time to ask the warranty provider the following:

• What exactly is included and excluded?
• Are my older systems and appliances covered?
• Are there any pre-existing conditions?
• How much do you charge for each service call fee?
• Am I allowed to use my own licensed contractor?
• What are the coverage limits and caps and limits?
• Who and what determines if a repair or replacement is needed?
• Are replacements refurbished or brand-new?
• What happens if my system or appliance is not repairable or replaceable?
• How and when can I cancel, and would my premium be refunded?
• How soon will coverage take effect after signing the contract?

Alternatives to a home warranty

Purchasing a home warranty plan isn’t your only option. Instead, you could opt to pay for repairs completely out-of-pocket, or set aside extra savings for unexpected home repair/replacement costs.

“Depending on the home’s condition, some buyers prefer saving the annual premium and using those funds toward future repairs instead,” Amodeo continues.

FAQ

Still not sure about some home warranty nuances and details? Let’s clear up any further confusion you may have.

What is the point of a home warranty?

The purpose of a home warranty is to help pay for the expenses related to a home repair or replacement that’s covered by the plan. Depending on the age and condition of your home’s systems, appliances, and components, you could save significant dollars with home warranty coverage.

What are the cons of a home warranty?

Home warranty plans provide peace of mind, but they come with several limitations and financial risks. Your coverage is often limited up to a strict dollar cap, specific coverage exclusions apply, you have to pay a service fee or deductible for every technician visit, claims can be turned down if you don’t meet strict criteria, and you can’t pick your own service provider.

What is a red flag on a home warranty?

Prior to signing any home warranty contract, take time to carefully review the fine print. That’s because these plans commonly have vague coverage terms, costly service fees or deductibles, low payout caps and exclusions, tight limits on claim approvals, and little to no choice in who performs the repair work.

How do I know if I already have a home warranty?

To determine whether you already have a home warranty, check your closing documents and ask your real estate agent, or builder if you purchased new construction, to confirm.

When can I purchase a home warranty?

You can buy a home warranty at any time. Just apply for one from a home warranty provider.

The bottom line: Understand your home warranty

Ultimately, a home warranty can be a smart investment if you want predictable fix-it costs and assurance about the lifespan and reliability of your home’s systems and appliances. By understanding what’s covered, comparing providers, and weighing the pros and cons, you can make a more informed decision.

Crunching the numbers on what your next home will cost with a home warranty attached? Get expert advice and a reliable price range for your dream home by trusting in Rocket Mortgage. Start the mortgage approval process today with our help.

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