What Is a Home Warranty, and How Does It Work?
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A home warranty is an annual plan that can cover replacements and repairs for your home's mechanical systems and appliances. In addition to paying an annual fee that's usually between $300 and $600, you'll also pay a service fee when a technician comes to your home to evaluate an issue.
In a buyer's market, a home seller may offer a home warranty as an incentive for buyers (and a little peace of mind for themselves, since the home buyer has someone else to contact if anything goes wrong after closing). In a hot seller's market where home buyers are waiving the home inspection contingency, purchasing a home warranty could be a balm for worries about potential unknowns.
To get the most out of a home warranty, it's important to read the fine print so you understand what's covered and how the plan works before signing up.
What is a home warranty?
A home warranty works similarly to any standard warranty, providing you with a way to get an item repaired or replaced without having to pay full price out of pocket. The difference is that a home warranty covers a range of items rather than just one. There are three standard types of home warranty plans.
System plans cover your home's mechanical systems, including heating and cooling, electrical and plumbing.
Appliance plans cover major appliances, like the dishwasher, oven and washing machine.
Combination plans include both mechanical systems and major appliances.
Some items, like in-ground sprinklers, swimming pools and septic systems, may require an additional warranty or might not be covered by all home warranty companies. When comparing home warranty companies, make sure the plan options encompass everything you'd want covered.
New construction homes often come with a warranty from the builder. Builder warranties are a little bit different, though, since they cover the home itself — including the structure and materials used to build it, as well as mechanical systems. Builder warranties generally do not cover appliances, though in a brand new home with brand new appliances, manufacturers' warranties are likely still in play.
If you're getting a home warranty for a new home — either new construction or a home that's new to you — coverage usually starts when you close. Already own your home? There's generally a 30-day waiting period before the home warranty kicks in. (The idea is to discourage buying a warranty just to fix something that's already broken.)
How does a home warranty work?
When something in your home breaks or needs maintenance, you contact your home warranty provider. The company will have an affiliated local technician come to your home to check out the issue, then decide whether you need a repair or replacement and whether it's covered by the warranty. If it's covered, they complete the work.
If the problem isn't covered by the warranty — either because the component isn't part of your plan or the company denies your claim — you'll have to cover the cost yourself. You'll also still be on the hook for the service fee charged to have someone come evaluate the problem (more on fees in the last section).
Home warranties will generally deny claims for preexisting conditions. In other words, if you're buying a home and an issue comes up during the home inspection or is noted in the seller's disclosures, your home warranty company may not cover it. Rather than relying solely on a warranty, try to negotiate with the seller to either remedy the issue or give you a credit to help cover the cost of having it fixed.
On the plus side, having a home warranty can save you time. You don't have to do research and get recommendations to find a tradesperson every time you need something fixed. The flip side of that is that you'll get whomever the home warranty company sends to do the evaluation and make the repair. You can't choose a contractor (or do the work yourself) and then get reimbursed.
Home warranty vs. home insurance
A home warranty is not the same as homeowners insurance. For one, homeowners insurance is required by lenders in order to obtain a mortgage, while a home warranty is entirely optional. But the bigger differences are in what they cover and how they work.
As mentioned above, a home warranty covers the repair and replacement of items and systems in your home. Though you might not know when your dishwasher will need to be repaired or replaced, neither event is a big surprise — no one expects a dishwasher to last forever.
Your homeowners insurance, on the other hand, covers the unexpected. It won't help you replace your appliances because they got old, but homeowners insurance could help you get new appliances if your existing ones are damaged in a fire or flood.
With homeowners insurance, you'll have to meet a deductible before the insurer starts paying for the cost of your claim. Home warranties do not have deductibles, just service fees and an annual fee that pays for the plan membership itself.
How much does a home warranty cost?
Home warranties generally cost between $300 and $600 per year; the cost will vary depending on the type of plan you have. The more that's covered, the pricier the plan — those add-ons can add up. Where you live can also affect the cost. Unless you've received a plan directly from your home builder or seller, it's a good idea to shop around to see which home warranty company will give you the best value.
Though you won't pay for the actual repairs, you will pay a service charge every time a tradesperson comes to your home to evaluate an issue. If more than one pro is required, you could end up paying a service fee more than once for the same job. This fee can range from about $60 to $125 for each service instance, making the service fee another point to consider if you're shopping for a home warranty plan.
One more home warranty cost to factor in: how much the plan will pay out in a given year. Depending on your plan, that could be per item or repair, or it could be an overall ceiling. In other words, once you hit the cap, you're paying out of pocket.
Should you get a home warranty?
Having your air conditioning fixed under a home warranty will almost certainly cost less than paying to have it replaced without one. But if you don't use the home warranty in a given year — or if you try to use it and your claim is denied — your cash may have been better spent elsewhere. (Though if you were gifted the warranty when you bought your home, it wasn't your money anyway, and you don't have to renew.)
One alternative to consider: Set aside money for home repairs and maintenance in a dedicated savings account. That way, your rainy-day fund is earning interest, so the longer you don't need to use it, the more money you have.
» MORE FOR CANADIAN READERS: What does a new home warranty cover?