Everything You Need to Know About Home Warranties

Think about this scenario: It’s the dog days of summer. It’s 90 degrees outside with 100 percent humidity. Your air conditioning was working fine when you moved in, but it hasn’t been cooling your house as efficiently as it did last season. Suddenly it cuts off and won’t come back on.

What would you do? Do you have the thousands of dollars it would cost to repair or replace it? If you have a home warranty, you won’t need to worry about it. A small fee and a few service visits later, and you’re back up and running with your home as cold as a meat locker.

Sounds great, but what are home warranties? What do they cover? How much do they cost? If you don’t have one, do you need to get one? We’ll cover all the ins and outs in this guide, but first things first: What exactly are these things?

What Is a Home Warranty?

In the simplest terms, a home warranty is a contract in which you pay a monthly fee to a company that will in turn help cover the costs of repair, service, or replacement of major home systems and appliances if they break down.

If something goes wrong and you need a repair, you’ll call the warranty company and they’ll coordinate with an approved service provider to come to your home and perform the work. You’ll pay a small fee when the technician comes out, but you won’t have to pay for the replacement or repair out of pocket.

How is this different from homeowners insurance? Glad you asked.

How Is a Home Warranty Different From Homeowners Insurance?

We literally wrote the ultimate guide to homeowners insurance, so check that out if you want all the details — or just read the Cliffs Notes version here. The biggest difference is that homeowners insurance doesn’t cover the cost of repair or replacement of appliances or systems that wore out due to regular wear and tear. Home warranties, on the other hand, do exactly that. It’s what they’re designed for.

Think of it this way: Your homeowners insurance protects your home and everything in it from outside threats. If a tree falls through your roof or someone breaks in and steals all your stuff, your homeowners insurance will cover it. Your home warranty protects you from having to bear the full cost of replacing major systems or appliances when they wear out over time. And eventually they will wear out.

When that time comes, you’ll either be on the hook for the costs or your warranty will cover the tab. That peace of mind is great, but it is important to know exactly what’s covered — and what isn’t — by a home warranty.

What Do Home Warranties Cover?

Your home warranty covers all the expensive stuff that makes your home function, which really falls into two camps: systems and major appliances. Systems include:

• Air conditioners
• Ductwork
• Electrical systems
• Plumbing
• Furnace

Major appliances include:

• Dishwashers
• Refrigerators
• Ovens
• Stoves
• Spas
• Washing machines
• Dryers
• Hot water heaters

Some plans cover only systems, some cover only appliances, some cover both, and some let you mix and match. The more coverage you have, however, the more expensive the plan will be.

How Much Do Home Warranties Cost?

Home warranties are usually charged monthly or annually, and the cost of your service will depend on what you’re covering. Most people, however, pay between $300 and $600 per year for a home warranty, and the standard service-call fee is between $75 and $125 depending on your provider and the system or appliance that needs attention.

That may sound like a lot of money, but consider this: On average, it costs between $5,000 and $10,000 to replace an HVAC unit. Suddenly that $60 per month doesn’t seem so steep, right?

Now that you know what home warranties are, what they cover, and how much they cost, let’s consider whether you need one.

What Are the Pros and Cons of a Home Warranty?

A good place to start when you’re thinking about any major home purchase is to consider the pros and cons. We’ve already listed the major ones, so take a look at our list to see if you agree.

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Pros of a Home Warranty

• Home warranties will help you absorb the cost of a major system or appliance breakdown, which could potentially save you tens of thousands of dollars.
• Home warranties offer broader coverage than manufacturers’ warranties, and they can be renewed. That means your systems and appliances can be protected indefinitely.
• You won’t have to track down contractors and repairmen if something goes wrong, and you won’t have to worry about them doing the job right. Your warranty company has approved technicians for every job.

Cons of a Home Warranty

• The costs can add up, especially if the warranty is never used. You never want something to go wrong, but if nothing does it can feel like you’ve wasted your money.
• You’ll still have to pay service fees and possibly a portion of the cost of the repair. A home warranty doesn’t make repair and replacement completely free.
• You don’t get to pick your handyman or contractor. Instead your home warranty provider will choose for you.
• You may run into a situation where you didn’t understand your coverage, which could mean you expect your warranty to cover the cost of a repair only to find out the company won’t.
• You could also be denied coverage if your systems or appliances were not properly maintained, and what’s considered proper maintenance can be a bit of a gray area. Worst case, you may be denied a valid claim because of the clause.

There definitely are some points to consider. Let’s frame it another way, though, to see if it makes your decision easier.

Who Should Buy a Home Warranty?

Every homebuyer’s situation and needs are unique, so some people may need a home warranty more than others. Consider these situations.

You’ve Purchased an Older Home

Not everyone buys new. If the home you’re interested in purchasing is over 10 years old, you may want to consider buying a home warranty — or having the seller throw one in. That will ensure the systems and major appliances used by the previous owner are protected. Make sure your inspection indicates they were properly maintained and in good working order at the time of purchase. Your warranty won’t cover repairs or replacement if the previous owner did not properly maintain their equipment.

Your Systems Are Reaching the End of Their Life Cycles

Even if you’ve taken care of everything in your home perfectly, it will eventually wear out. If you know major home systems are approaching the end of their lifespan, consider purchasing a home warranty to help offset costs when they go out.

You Don’t Have the Time or Skills to Fix Things Around the House

A lot of people have no problem popping the control panel off their washing machine or fixing some faulty wiring in a light socket, but just as many are intimidated by such repairs — or simply don’t have the time to make them. If you’re in the second camp, consider purchasing a home warranty.

You’re Buying a House on a Tight Budget

Buying a house is an expensive process, and many people’s budgets are stretched to the limit when it’s time to sign on the dotted line. And doesn’t it seem like things go wrong at the worst possible time? Purchasing a home warranty while you’re replenishing your cash reserves immediately after purchasing a home can be a good idea to make sure you’re protected if Murphy and his law come knocking.

You’re Selling a Home

When you’re selling your home, you want to have a competitive edge to entice buyers. Adding a home warranty to ease their minds may sweeten the deal enough to turn a hesitant buyer’s “maybe” into an emphatic “yes.”

There are quite a few situations where having a home warranty may be beneficial, but there are a few occasions when they don’t make a lot of sense.

When Do You Not Need a Home Warranty?

Home warranties can provide a lot of peace of mind in certain scenarios, but in others they may be a waste. Check out some scenarios when you may be better off without one.

You’re Purchasing a Brand-New Home

If you’re building a home yourself or purchasing a home no one has occupied before, a home warranty may not be a great investment. All your appliances and systems are brand new — meaning they’re unlikely to suddenly fail — and they are all likely under manufacturers’ warranties that will cover any problems.

You Have a Healthy Amount of Cash on Hand

If you’ve saved up a healthy emergency fund that could cover home repairs with a hefty price tag, you may be better served using the money you’d spend every month on a home warranty to continue growing that account — especially if it has the potential to accrue interest.

You Already Have Relationships With Handymen and Contractors You Trust

A pretty significant secondary benefit of having a home warranty is that your provider will connect you with a trusted technician to handle repairs and replacements. That could, however, actually be a huge drawback of home warranties if you get a poor service provider that botches the job. If you already “have a guy for that,” you may not need a warranty after all.

Now that you have a clear understanding of what home warranties are, what they cover, how much they cost, and the types of people who benefit from them, let’s answer the question: Are home warranties worth the money?

Home Warranties: The Bottom Line

Home warranties absolutely make sense for certain types of homeowners. If you need protections from catastrophic failures and home system breakdowns and you know you won’t have the cash on hand when they occur, a warranty can really be a lifesaver.

If you’re buying a home warranty, make sure you understand your coverage in and out. Talk to the provider to understand your limits, what will be covered, and what might disqualify you from coverage.

If you’re going to go without, make sure you have a contingency plan. You’ll need a solution for what will happen if a major home system or appliance goes out, because without a home warranty you’ll be on your own.