What You Need to Know About Home Warranties

The term “home warranty” can be slightly confusing. What’s the difference between a home warranty and homeowners insurance? What does a home warranty cover? How much does it cost? We've done dozens of hours of research, gathering quotes, talking to brands, and trying out home warranties to answer these questions and more.

A home warranty is a service contract that covers the repair or replacement of household appliances and mechanical systems. If something breaks down that's covered by your home warranty, you file a claim, and the company will send a repair technician to your home to repair whatever broke.

Generally, the best home warranties cover appliances and systems around your home, such as:

• Air conditioning systems
• Heating systems
• Electrical systems
• Plumbing systems and stoppages
• Water heaters
• Refrigerators
• Ovens, ranges, and stoves
• Cooktops
• Dishwashers
• Built-in microwaves
• Garbage disposals
• Clothes washers and dryers
• Garage door openers
• Ceiling and exhaust fans
• Ductwork

You can usually choose which items are covered in your policy. For an addition fee, you can often add on extra coverage for things like pool/spa equipment, well pumps, roof repair, and septic systems.

Most home warranty companies come with stipulations in their contracts that can get your claim denied. Here's a list of limitations and exclusions often found in home warranty contracts:

• Your policy doesn't cover damage from misuse/neglect.
• Pre-existing conditions before the warranty starts aren't covered.
• Upgrades or modifications are often not covered.
• Manufacturer recalls or defects covered by a separate warranty aren't covered.
• Service coverage does not include permits for repairs or replacements, code violations, or costs to meet new building codes.
• Solar systems and energy management equipment aren't included.
• Disposal fees for old equipment aren't included in coverage.
• Commercial-grade appliances or systems aren't covered.

It’s hard to pin down exact costs because most home warranty companies prefer custom quotes to standard pricing, but our research has found that home warranty plans usually cost somewhere from $30 to $100 per month (take a look at some examples in the table, below). 

On top of plan costs, homeowners usually pay a service fee (also called a deductible) that can cost anywhere between $75 and $125 per repair. You pay a deductible anytime you file a claim. Sometimes, you can choose a higher service fee to lower your monthly payment and vice versa. 

Your service fee should cover the costs of repairing or replacing your item. This isn't always the case, though. Home warranty contracts include coverage caps, which is the maximum amount the company will pay to repair or replace an item.

For example, if your contract stipulates a $1,000 cap on refrigerators, but your repair cost is $1,500, you'll need to pay the extra $500 out of pocket. Be sure to check your contract to see what your coverage caps are. 

How a home warranty works isn’t all that complicated. When your mechanical system or household appliance has problems, this is what happens next:

1. You call your home warranty company or submit a claim through the online customer portal.
2. You pay your service fee.
3. The home warranty company sends a contractor to your house.
4. The contractor diagnoses the problem and either repairs or replaces the problem item.
5. Your home warranty company pays the contractor.

If the contractor has to come back multiple times, your service fee often covers each return until the problem is fixed. Some companies offer a coverage guarantee that if your item breaks down within 30 days, you don't need to pay another service fee.

Yes, most home warranties cover both parts and labor for repairs. Remember, though, that the company may cap the amount it will cover or only cover repairs performed by certain technicians. Be sure to check your contract.

Most home warranties have a wait period after you purchase your policy. Typically, you'll need to wait 30 days to file a claim. Why? Most companies don't cover pre-existing conditions. The wait period protects the home warranty company from people who try to file claims on systems or appliances that were broken before they signed their contract. 

The main difference between a home warranty and home insurance is the type of coverage they provide. Here's a breakdown:

• A home warranty covers repairs or replacements of major appliances and home systems that break down due to normal wear and tear (e.g., HVAC, plumbing, refrigerators).

• Home insurance protects against accidental damage to your home or belongings from disasters like fire, theft, floods, and vandalism.

Home warranties can be handy when integral mechanical systems or expensive appliances break down unexpectedly. They can be especially helpful for new homeowners or prospective buyers with little or no savings to repair systems and appliances they inherited from the previous owners. 

A good rule of thumb is to start by weighing potential repair costs versus average premium costs. You also may want to consider the age of your mechanical system or household appliance. Older systems and appliances are more likely to break down than newer models.

And remember, as with any contract, the devil is in the details. Be sure to thoroughly read the contract to know exactly what's covered and what isn't.

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