What is a home warranty and how does it work?

A home warranty works a lot like warranties offered with other large purchases like a car or a new refrigerator. In fact, a home warranty is meant to pay for needed repairs or replacements if certain covered components of a home have problems or break down altogether. If your HVAC system stops working while you have a home warranty in place, for example, the warranty company will send out a representative to take a look, propose a solution and provide a fix.

That said, you don't want to confuse home warranties with homeowners insurance since these coverages are not alike at all. Where a home warranty is an optional coverage that can pay for repairs around a home when a major component breaks down, homeowners insurance can pay for total replacement of a home structure and/or its components when a covered peril like a lightning strike or fire causes considerable damage to a property and usually is non-optional if you have a mortgage.

What to know about a home warranty

• A home warranty is a type of warranty coverage that provides protection for major components of a property, such as the HVAC system, plumbing system, water heater, dishwasher and more.
• Home warranties are typically purchased on an annual basis or for several years at a time, and most home warranty companies offer several "tiers" of coverage to pick from.
• Most home warranty companies choose the contractor who comes to your home and does the work when you file a claim, although a handful of companies let you choose your own.
• The majority of home warranties have a deductible or service fee. This fee must be paid to get a contractor out to a home for potential repairs and replacement, and it's charged for each home warranty claim that is made.

How does a home warranty work?

Home warranties are entirely optional for homeowners, and they are typically purchased on an annual or multi-year basis. The covered systems and appliances within a home warranty plan can vary by company and by the specific plan chosen. However, these warranties can pay for repairs or full replacement when a covered home system, appliance or component has issues or stops working while the home warranty is in place.

Generally speaking, home warranty customers need to call their home warranty company any time they need help with a covered system or appliance. At that point, the home warranty company sends out a contractor to take a look, and the homeowner has to pay the company a service fee (similar to a deductible) to access their warranty benefits. In most cases, these deductibles range from $75 to $125.

At that point, the contractor makes recommendations to move forward with the issue, and whether repair or replacement is in order. In the ideal situation, the contractor does the work in full, restores the home system or appliance into working order and the homeowner pays less than they would if they had to come completely out-of-pocket to pay for the work.

What does a home warranty cover?

All home warranties are unique, and this is not only based on price and plans but also on the parts of a home they will actually cover. That said, the following list includes major home components, systems and appliances that can be covered by a home warranty:

• Heating and air conditioning systems.
• Electrical systems.
• Plumbing systems.
• Exterior water and sewer lines.
• Water heaters.
• Built-in dishwashers.
• Built-in overs.
• Refrigerators.
• Washers and dryers.
• Garbage disposals.
• Built-in microwaves.
• Septic systems.
• Attic and exhaust fans.
• Sump pumps.
• Roof leak repairs.
• Ductwork.
• Humidifiers.

Also note that home warranty companies tend to offer some optional coverages you can add to a plan if you need to. Examples of optional coverages offered with home warranties include:

• Pool pumps.
• Lawn sprinkler systems.
• Well pumps.
• Central vacuums.
• Freestanding freezers.
• Spa equipment.

Note that home warranty companies can cover repairs to these items or total replacement. It all depends on the work that's required to get them in working order. If your air conditioning stops working completely and a total replacement of the system is the only answer, home warranty companies would theoretically plan a full system replacement and foot the entire bill (minus the deductible or service fee).

Home warranty pros and cons

Home warranties seem like a good idea. After all, replacing major home systems and appliances can become costly in a hurry. In the meantime, the average home warranty costs between $350 and $600 per year, give or take. If you could potentially save thousands of dollars on needed home repairs, wouldn't paying $350 to $600 be well worth it?

Unfortunately, you may not get to use the home warranty coverage when you have it since home problems only come up part of the time. Not only that, but home warranty companies are known for their disappointing service.

Here are some pros and cons to know about with these companies:

Home warranty advantages

• You have the potential to save on home repairs. A well-timed home warranty purchase could lead to thousands of dollars in savings if an expensive repair or total replacement of a home system is required.
• Home warranties are relatively affordable. Most home warranties cost between $350 and $600, which means they can be relatively inexpensive.
• Gain some peace of mind. Sleep well at night knowing you have some coverage if your HVAC system breaks down, your refrigerator breaks or a leaky roof causes damage.
• Choose a plan to suit your needs. You can compare home warranty companies and their plans before you buy, which lets you line up the exact coverage you need.

Home warranty disadvantages

• You may pay for coverage you don't use. If you pay for a home warranty and nothing breaks down, you might feel like you're throwing money out the window.
• Service fees apply. Service fees from $75 to $125 apply when you call a home warranty company out to your home, and these fees may cost more than the repair itself.
• Home warranty companies have a poor reputation. Home warranty companies receive regular complaints for not making required repairs, doing a "quick fix" to get systems working again and taking weeks and months to get the work done.
• Exclusions can apply. Home warranty companies are also known for their exclusions and fine print. For example, they may refuse to do a repair if they feel the issue was caused by lack of maintenance on a covered appliance or system.

When should you get a home warranty?

Consider getting a home warranty if you want the peace of mind that comes with knowing you have some protection from exorbitant repair bills if a major system or appliance breaks down in your home, and you dont have appliance insurance. That said, you'll want to compare home warranty companies and their plans before you buy one and make sure you read reviews for each company so you know what kind of service and customer support to expect.

While it's possible to purchase a home warranty on your own, many homebuyers also ask for home warranties during negotiations for the purchase of a property. In this scenario, the home seller typically pays for the home warranty out of their profits on the home during closing.

Home warranty vs. homeowners insurance

Where home warranties are totally optional for homeowners, homeowners insurance is not optional if you have a mortgage on a property. Homeowners insurance also covers an entirely different set of perils and problems than home warranties.

For example, most homeowners insurance policies cover:

• The structure of a home.
• Other structures on a property.
• Personal belongings.
• Liability for injuries.
• Damage to other people's property caused by the homeowner.

Also be aware that homeowners insurance comes into play in an entirely different set of circumstances. Where home warranties pay for repairs or replacement when major systems break down, homeowners insurance pays for claims, including the total rebuilding of a home, when covered perils take place. These can include instances of fire, lightning strikes, windstorms, hail, explosions, falling objects and more.

Peace of mind for homeowners

Home warranties can offer peace of mind and financial savings when everything goes as planned. These companies also make it easier to get a free quote for coverage online, and many offer several tiers of home warranty coverage to choose from.

Many home warranty companies, are also available for claims and calls 24 hours a day and seven days per week. With that in mind, it makes sense to at least consider a home warranty if you think you could benefit from this coverage and the financial protection you’d receive.