What is a home warranty, and is it worth buying?

What a home warranty actually is

A home warranty — the industry also calls it a home service contract or residential service contract — is an annual agreement between a homeowner and a warranty company. The homeowner pays a yearly premium. In exchange, when a covered system or appliance stops working because it wore out, the company sends a contractor from its network and pays the repair bill above the service call fee, up to the dollar limits written into the contract.

The word "warranty" is misleading in one specific way. A manufacturer's warranty comes free with a new appliance and covers defects for a fixed term. A home warranty is something you buy separately, it renews annually, and it covers items long past their manufacturer coverage. The two rarely overlap, because most home warranty contracts explicitly exclude anything still covered by a manufacturer.

Home warranty companies are regulated at the state level, and not always as insurers. In some states they fall under the insurance department; in others they are licensed as service contract providers under a consumer protection statute. That distinction matters when you have a dispute, because it determines which agency hears the complaint.

What a home warranty covers

Coverage is sold in two buckets — systems and appliances — and most companies sell a systems plan, an appliance plan, and a combination plan that bundles both at a discount. What follows is the coverage that appears in most standard contracts. Every contract differs, and the contract controls.

Home systems typically covered

• Heating system and ductwork
• Central air conditioning
• Electrical system — wiring, panels, breakers, switches
• Plumbing system and plumbing stoppages
• Water heater
• Garbage disposal
• Ceiling and exhaust fans
• Doorbells and built-in garage door openers

Appliances typically covered

• Refrigerator (often only the built-in kitchen unit)
• Oven, range and cooktop
• Built-in microwave
• Dishwasher
• Clothes washer and dryer

Common paid add-ons

Items that fall outside the base plan can usually be added for an extra annual charge, commonly $50 to $200 each:

• Pool and spa equipment
• Well pump and septic system
• Second refrigerator or stand-alone freezer
• Sump pump
• Limited roof leak coverage
• Central vacuum
• Guest house or detached structure systems

What a home warranty does not cover

Denied claims almost always trace back to one of the exclusions below. Reading this list before you buy is the single most useful thing a homeowner can do with a warranty contract.

• Pre-existing conditions. A failure that already existed, or a defect that a competent inspection would have found, when coverage began. This is the most common reason a first-year claim is denied.
• Improper installation, modification or prior repair. If a previous owner or an unlicensed contractor installed the unit incorrectly, the resulting failure is usually excluded.
• Lack of maintenance. A compressor that failed because the coils were never cleaned, or a water heater that failed because it was never flushed, can be excluded as neglect.
• Damage from a peril. Fire, storm, flood, lightning, freeze, vandalism and theft are homeowners insurance events, not warranty events.
• Structural components. Foundations, framing, walls, roofs (except limited add-on leak coverage), windows, doors and flooring.
• Cosmetic defects. A dented refrigerator door or a scratched cooktop still functions, so it is not a covered failure.
• Code upgrades, permits and haul-away. Many contracts pay for the replacement unit but not for bringing the surrounding installation up to current code, pulling permits, or disposing of the old equipment. Some companies sell that as an add-on.
• Items under manufacturer or builder warranty. Covered elsewhere, so excluded here.
• Commercial-grade or non-residential equipment, and equipment serving more than one dwelling unit.

Home warranty vs. homeowners insurance

These two products are frequently confused, and they are not substitutes for each other. A home warranty answers the question "what happens when something wears out?" Homeowners insurance answers "what happens when something bad happens to the house?" Most homeowners with a mortgage are required to carry insurance and are never required to carry a warranty.

The practical takeaway: carrying both is normal, and neither one fills the other's gap. A homeowner with insurance but no warranty pays out of pocket when the air conditioner dies. A homeowner with a warranty but no insurance is uninsured against a fire — and in breach of the mortgage.

What a home warranty costs

Pricing has two parts, and comparing plans on premium alone is a mistake because a low premium is often paired with a high service fee.

• Annual premium: roughly $400 to $700 for a combination systems-and-appliances plan on an average single-family home, or about $35 to $60 a month when paid monthly. Systems-only or appliance-only plans run lower; premium plans with higher caps and more add-ons run higher.
• Service call fee (trade service fee): $75 to $125 per service visit, paid to the contractor at the time of the visit. Many companies let you choose a lower fee in exchange for a higher premium, or vice versa.
• Add-on coverage: commonly $50 to $200 per item per year for pool equipment, septic, well pump and similar.

Two cost details are easy to miss. First, the service fee is usually charged per visit, sometimes per trade, so a week in which the plumber and the HVAC technician both come out can cost two fees. Second, monthly billing frequently totals more over twelve months than paying the annual premium up front.

The arithmetic that decides whether a plan pays for itself is straightforward. At $600 a year plus a $100 service fee, a single covered HVAC repair — often $700 to $1,500 out of pocket — makes the year worthwhile. Two consecutive years with no covered failure does not.

How a home warranty claim works

The process is consistent across the industry, and the homeowner's role is narrower than with an insurance claim: you report the failure, and the company chooses the contractor.

• 1. Report the failure. Call the company's claims line or file online. Most operate 24/7. Do not call your own contractor first — unauthorized repairs are routinely denied.
• 2. The company assigns a contractor. A licensed contractor from its network contacts you, usually within 24 to 48 hours, to schedule the visit.
• 3. Diagnosis, and you pay the service fee. The technician diagnoses the failure and reports the cause to the warranty company. You pay the service fee for that visit whether or not the claim is ultimately approved.
• 4. The company approves or denies. Approval turns on whether the failure was normal wear on a covered item. A denial should come with a written reason citing the contract section relied on.
• 5. Repair or replace. The company generally decides between repairing and replacing, and pays up to the item's cap. If a replacement exceeds the cap, some companies offer cash in lieu at their wholesale cost rather than the retail price you would pay.

Two timing rules are worth knowing before you need them. New plans bought outside a real estate transaction usually carry a waiting period of about 30 days before coverage begins, which prevents buying a plan after something has already broken. Plans purchased as part of a home sale typically start at closing with no waiting period.

When buying a home warranty makes sense

Older homes with aging equipment

A home warranty is essentially a bet on failure probability, and that bet gets better as equipment ages. Systems approaching the end of their service life — an HVAC system past 12 to 15 years, a water heater past 10, original kitchen appliances in a home built in the 1990s or early 2000s — are the case where warranties most often pay. A house whose furnace, water heater and appliances were all replaced in the last three years is the case where they least often do.

Real estate transactions

Home warranties are common in resale transactions for reasons that have little to do with actuarial value. A seller may offer a one-year plan as a concession that costs a few hundred dollars but removes a buyer's worry about a system the inspection flagged as aging. A buyer who has just emptied savings into a down payment gets a year of predictable repair costs while cash reserves rebuild. Some companies also cover the seller during the listing period at no extra charge when the buyer's plan is purchased at closing.

Landlords and rental property

For a landlord, the value is operational as much as financial. A warranty converts unpredictable repair bills into a fixed annual line item, and it supplies a contractor network that answers a tenant's after-hours call — which matters a great deal for an owner managing a property from out of state. Confirm before buying that the plan permits tenant-occupied properties; some consumer plans do not.

When it usually does not make sense

• New construction still under a builder's warranty, with appliances still under manufacturer coverage.
• A homeowner with a healthy repair reserve and a trusted contractor already in hand — paying cash for repairs avoids premiums, service fees, caps and network restrictions.
• A home whose major systems were all recently replaced.
• A homeowner unwilling to accept the company's choice of contractor, which is the structural trade-off of every warranty plan.

Questions to ask before you buy

Ask these before signing, and ask for the answers in the sample contract rather than from a sales script. Every reputable company will send the full contract on request before purchase.

• What is the per-item cap for HVAC, water heater and each appliance, and is there an aggregate annual cap?
• How is a pre-existing condition defined, and is a home inspection or maintenance record required?
• Is there a waiting period, and does it apply if the plan is bought at closing?
• Who decides between repair and replacement, and is cash in lieu paid at retail or wholesale value?
• Is the service fee charged per visit or per trade, and does a repeat visit for the same failure cost another fee?
• Are code upgrades, permits, refrigerant, modifications and haul-away covered, or excluded?
• May I use my own licensed contractor, and if so what pre-authorization is required?
• What is the response time commitment, and what happens when no network contractor is available in my area?
• What is the cancellation policy — is there a full-refund window, and are later refunds prorated?
• Is the plan valid on a tenant-occupied property?
• Which state agency regulates the company, and what is its complaint record?