Home Warranty: What You Need to Know
A home warranty is a service contract that protects your home’s appliances and systems, such as plumbing, electrical and HVAC. For a monthly or annual price, a home warranty will repair or replace appliances and systems that malfunction or have broken down due to normal wear and tear. In addition, a home warranty may include add-on coverage for things like pools and hot tubs, if you pay extra.
What Does a Home Warranty Cover?
A home warranty covers eligible appliances and systems. Home warranty plans are typically categorized into three broad areas:
- Appliance plans (e.g., washer/dryer, dishwasher, and refrigerator)
- Systems plans (e.g., air conditioning, heating, plumbing, and electrical)
- Combo plans that cover everything included in the appliance and systems plans
The specifics depend on the company, but most companies have separate plans for each.
The following items are typically covered by the best home warranties.
- Heating system
- Air conditioning systems (HVAC systems)
- Electrical system
- Plumbing system
- Water heaters
Covered home appliances
- Garbage disposals
- Ceiling fans
- Bathroom exhaust fans
- Clothes washers and dryers
- Garage door openers
- Ovens / stoves / cooktops
- Refrigerators / freezers
- Ice makers
- Trash compactors
- Instant hot water dispensers
- Swimming pools
- Septic pumps
- Lawn sprinklers
- Second appliances, such as A/C or refrigerators
What Isn’t Covered?
Most home warranty providers won’t cover structural elements like windows, walls, floors and foundations. Other items not covered include:
- Cosmetic damage
- Light fixtures
- Outdoor water systems
- Remote controls
- Disposing of debris
- Appliance accessories
It is very important that you go through the home warranty contract before signing and purchasing to see what major systems and appliances are included.
Many (but not all) home warranty companies will also deny claims if an appliance or system:
- Was not installed correctly or maintained properly
- Was not used properly
- Does not meet local building codes
- Had a known or unknown pre-existing condition when you bought the warranty
While a home warranty can provide coverage in case home appliances or systems break down or fail due to normal wear and tear, warranties don’t replace homeowners’ insurance.
They won’t cover your property against the types of disasters covered by homeowner policies. For example, warranties are not meant to cover repairs to a home’s foundation or its structure due to accidents. In addition, they do not protect you against liability if someone gets hurt on your property.
What Does a Home Warranty Cost?
There are two costs to look at when you compare home warranty plans: the service fee and the monthly (or annual) cost.
The service fee is the amount you pay each time you request service. These fees typically range between $55 and $150. Depending on the company, you can choose from one, two, or three service fees. In general, the lower the service fee, the more expensive the plan.
The monthly or annual cost of the warranty ranges from about $350 to more than $1,100 a year, depending on the plan, service fee and house size.
In addition, prices may vary depending on where you live. The American Home Shield website, for example, says a plan that covers most major appliances runs about $480 annually for a home in central Ohio; one that also includes the home’s electrical and plumbing systems costs close to $600.
On the other hand, a homeowner in Westchester, NY might pay $900 to cover major appliances and more than $1000 to include electrical and plumbing.
Of course, your final numbers will depend on various factors, particularly on whether you decide to include optional add-ons.
How Does It Work?
After you choose a plan, service fee, and any add-on coverage, you pay upfront for the entire year or set up monthly payments. Most companies have a waiting period of 15 to 30 days after you buy the plan before coverage takes effect.
Generally, the technician sent by the home warranty company will first try and repair the malfunctioning appliance or system. If that’s not possible, a replacement will be installed.
While the specifics depend on the company, here’s how a home warranty typically works:
- If a covered appliance or system breaks down, you submit a claim with your home warranty company. Most companies have 24/7/365 customer service representatives ready to help you.
- Your home warranty company then chooses a service provider.
- The service provider contacts you to set up an appointment.
- The technician comes to your home to diagnose the problem. If it’s covered, the technician repairs or replaces the item.
- You pay the service fee, and then the home warranty company covers the rest.
Does a Home Warranty Come with Limitations?
Having a home warranty may provide you with some peace of mind. However, home warranty providers build in limitations that can make it easier for them to deny paying you. As a result, consumers often complain to the Better Business Bureau about home warranties because they didn’t get the benefits they expected.
Home warranties have coverage limits and exclusions. Because of this, some claims might be denied. For example, some policies will cover your refrigerator but not the icemaker that comes with it. Sometimes, if your appliance breaks under certain circumstances, it won’t be covered. An oven, for instance, may not be covered if it stops working while in self-clean mode.
Caps on Pay-Outs.
All home warranty companies have caps or coverage limits that will determine how much they will pay to cover any claims you make. Depending on your specific plan and coverage options, these limits can range anywhere from $500 to upwards of $3,000 or more.
So, if your contract says the maximum dollar amount on refrigerator coverage is $2,000, that’s the most they will pay to repair or replace. (This depends, of course, that you are paying your premiums. And you pay the service fee.)
In addition, some companies have aggregate limits, an annual cap on the amount they will pay out for all claims. If you submit claims that exceed these limits, you will have to pay for repairs or replacements yourself.
For example, you may be covered for up to $2,000 per year per appliance, with an annual claim limit of $15,000. Read the fine print on your contract to be sure you understand what’s covered by the plan and the limits that apply. This may be especially important if you have higher-end appliances and systems.
It is important to know all these details before you decide on a company and plan.
Is a Home Inspection Required?
Most home warranty companies don’t require a home inspection when you purchase one of their plans.
Differences Between a Home Warranty and a Homeowner’s Insurance Policy
Homeowners’ insurance protects against any accidental damage to your home and belongings due to theft, fire, storms and natural disasters. A home warranty protects your home, too, but it works differently.
A home warranty is a service contract that helps pay for repairs and replacements for covered appliances and major home systems.
In general, you don’t need a home inspection or maintenance records to buy coverage. And it doesn’t matter if your home is brand new or 50 years old.
While home warranty coverage and homeowner’s insurance policies have some things in common, they are essentially two different products. The main differences lie in what they cover.
A Home Warranty
- Covers repair or replacement of appliances and home systems
- Not required with a mortgage
- Sometimes included by home sellers as part of a home sale
- Can be transferred to a new owner
- Covers the home’s structure and contents from damage due to accidents and natural disasters
- Required by mortgage lenders
- Cannot be passed on to a new owner
Are They Worth It?
A home warranty can offer you peace of mind by covering unexpected expenses related to system break downs and appliance malfunctions. Whether a home warranty is right for you depends on the age of your home and the quality of your appliances.
However, if your major appliances and home systems are new and/or covered by manufacturers’ warranties, you probably don’t need to purchase a home warranty plan.
But every appliance and home system will eventually break down.
According to the “1% rule,” as set forth in the Investopedia article “Best Home Warranties”, you should set aside at least one percent of your home’s value each year to cover maintenance and repairs. For example, if your home cost $200,000, you should budget $2,000 a year for maintenance.
The annual cost of a home warranty could be well under what the 1% rule advises, even if you use the service several times a year. Do the math: Say you have a $200,000 home and you set aside the recommended $2,000 a year for maintenance. Compare this to the costs of a home warranty. If the plan costs $500 a year and you have a $100 service fee, you could make 15 claims before reaching that $2,000 threshold.
If you’re thinking of buying a home warranty, your first step should be to evaluate whether it covers what you want it to.
- Home warranty policies aren’t required, but they cover situations that insurance doesn’t
- Investing a few hundred dollars in a warranty can save you thousands
- A home warranty can be particularly worthwhile when buying a home
When choosing a home warranty program, it’s important to consider the type of coverage you need, as well as the cost. Before selecting a home warranty program, comparison shop between companies, as coverage and rates will vary.
Always read the fine print and know the details regarding your coverage and covered items. Just because a system or appliance is listed under your plan doesn’t mean it will always be covered. Home warranty companies have a reputation for denying claims and finding all kinds of reasons not to cover items.
Still, a home warranty often ends up saving money in the long run. And it can certainly help you budget and provide peace of mind.
Special thanks to Money.com for their suggestion for this article.
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