What Is a Home Warranty? 

Don’t confuse a home warranty with insurance — the two concepts are entirely different. A home warranty covers the repair and replacement of certain appliances and home systems. Coverage varies based on the issuer, but typically, the appliances, plumbing, heating and air conditioning systems are included. 

Insurance is designed for unexpected events, like theft, hail damage and fire. Home warranties cover the expected. For instance, your hot water heater or HVAC system will break, because they aren't designed to last forever. But there are some similarities: Like insurance, a home warranty policy is usually paid for in advance and can be renewed yearly.

How Does a Home Warranty Work? 

If you have a home warranty, you’ll call that company when something breaks, and they will hire a contractor to fix the issue. Often, they’ll charge a service call fee, which the homeowner must pay. 

The contractor will assess the situation, determine whether a repair or replacement is needed, and contact the home warranty company. If covered, the home warranty company pays the contractor for the repair cost and any replacement costs. 
Let’s say you purchased a refrigerator two years ago. The manufacturer's warranty has expired, but you have a home warranty. (Hoorah!) Assuming your refrigerator is a covered appliance, it will be replaced free of charge. 

But it’s not always that easy. Pay attention to any stipulations and exclusions, which might exclude some repairs or replacements. 

How Much Does a Home Warranty Cost? 

A home warranty typically costs between $350 and $600 for a one-year contract term, with an average of $400 for basic coverage. Additional coverage, like for a pool or guest house, might cost more. When choosing a company, make sure to compare service charge fees, too.

Most home warranty plans are paid-for upfront, although some companies offer installment plans. A home’s age generally does not play a part in the pricing, unless it’s new construction, which tends to increase the cost. For older properties you’re intending to rent out, they might merit more consideration: Home warranties are an easy, hands-off landlording strategy.

Even with a home warranty, however, the homeowner may have to pay for repairs out-of-pocket. And companies can deny repairs or replacements for various reasons, such as the lack of proper maintenance — so don’t skip replacing air filters or de-linting your dryer just because you have a warranty.

Service fees range from $50 to $100. If more than one service provider comes out — for instance, if a broken dishwasher requires an electrician and a plumber — then you might pay multiple service call fees.

Home Warranties and Home Buyers and Sellers 

Home warranties are recommended when buying or selling a home. The sellers may consider offering the buyer a one-year home warranty, which can limit potential liability issues if something breaks. If an appliance or system breaks shortly after closing, a buyer could sue the seller to recoup the costs — if a home warranty is in place this could be avoided. 

If you’re selling property, keep in mind that you still must disclose known issues even if you’re providing a home warranty. 

The biggest benefactors of home warranties? First-time homeowners. Repair funds might be low after making a new home purchase — so a warranty can be extremely helpful. Having a home warranty included in the purchase can keep a limited budget intact and prevent homeowners from driving up credit card debt if they need to replace home appliances or major home systems.

Regulation of Home Warranty Companies

Home warranty companies market heavily to real estate brokerages, but they are prohibited from paying agents and brokers referral fees. Some real estate agents will include a home warranty as a gift to the buyer, and many Realtors will advise their seller clients to purchase a policy.

Every U.S. state regulates home warranties, although it varies which department or laws has jurisdiction. In some states, the Attorney General’s office regulates home warranty companies; the Real Estate Commission handles regulation in others. In 32 states, home warranty companies must register with the Department of Insurance.

Home Warranty vs. Home Insurance

A home warranty is different than homeowner’s insurance policy. Homeowner’s insurance covers losses as a result of major hazards and unexpected events, such as fires, crimes, hail, and some forms of water damage. 

Home warranties are not a form of insurance. They are service contracts between a home warranty company and a homeowner for providing repair or replacement services, covering only the failure of housing systems and appliances. If your washing machine breaks, your home insurance will be of no use.

What Does a Home Warranty Plan Cover?

Although coverage varies based on the company, the typical home warranty coverage will include major systems like: 

  • Air conditioners 
  • Plumbing system
  • Furnace and heating system 
  • Electrical systems 
  • Major appliances, such as oven and dishwasher
  • Doorbells
  • Water heater 
  • Garbage disposals 
  • Some indoor plumbing issues 
  • Ceiling fans.

Most home warranties will exclude coverage of certain things, such as:

  • Most faucet repairs 
  • Anything outdoor
  • Pools and spas 
  • Separate structures, such as guest houses 
  • Items broken before closing on a property.

In most cases, the items not covered as part of the basic coverage can be added for an additional fee. Check your home warranty contract to know exactly what's included.

Home Warranty Denials

Home warranty companies get a bad rap for denying repairs or payments. It’s in the best interest of these companies to keep payouts low, thus they may purposefully look for ways to avoid having to make payments. Read and understand your home warranty’s service contract, which will include what’s covered and any exclusions.

A home warranty provider can refuse to pay for a repair or replacement for a number of reasons. These include: 

  • Non-covered items, like a broken window
  • Excluded services, such as replacing missing parts or components
  • Inconsistent or improper maintenance
  • Faulty installation
  • Code violations
  • Normal wear and tear
  • Pre-existing conditions.

Pros and Cons of a Home Warranty 

There are a lot of good reasons to pay for a home warranty. These reasons include: 

  • Peace of mind, because you won't pay for some expensive home repairs, like replacing kitchen appliances
  • Saving money, because home warranties cover major repairs that can cost hundreds of dollars out-of-pocket
  • Saving homeowners time and hassle, because they don’t have to search for and contact contractors. 
 
But home warranties do come with a few cons, which include:

  • Lower-skill contractors, because home warranty companies tend to seek out contractors that charge the lowest prices — and you have no freedom or say in which contractor is used
  • Replacements that may not be the highest-quality brand or match the room’s décor, because homeowners have little to no say in the model or brand of the new appliance or system
  • Denied service with many conditions leaving a lot of room for interpretation, such as proper maintenance.

A big counterargument against home warranties is that they don’t always make financial sense. Some house flippers think warranties aren’t worth the cost (listen to flipper Ashley Wilson explain why she always skips this major expense). Also, in the case that something doesn’t break for several years, the money used for home warranties could’ve been invested in a savings account or used for other purposes. Some homeowners are better off investing the premium they’d pay to a home warranty company in a savings account to cover the cost of repairs that do, eventually, arise.

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