Home Warranty: What It Is, How It Works & Alternatives

A home warranty offers to coordinate the repair and replacement of household appliances, plumbing, and electrical systems. It’s usually purchased by a seller for a buyer to compensate for older appliances, electrical, and plumbing systems. A home warranty is usually not worth it for buyers since there are numerous coverage exceptions.

JUMP TO SECTION

• What it is
• Costs
• Terms
• Is it worth it?
• Alternative for buyers
• How it works
• What can go wrong?
• Get the most from it
• Key takeaways

What is a home warranty?

A home warranty is a service that provides protection from high repair costs on major appliances, electrical, and plumbing systems. A home warranty may also be referred to as home maintenance insurance, home warranty protection, a home warranty plan, or a home warranty policy.

Unlike home insurance, which covers unexpected damages, a home warranty only covers damage caused by normal use. Like health insurance, the service has both a monthly fee ($25 to $50) and a service fee ($50 to $100) that you pay whenever you request a repair. The lower your monthly premium, the higher your service fee will be.

Common Costs for Home Warranty Plans

Typical Home Warranty Terms

A home warranty contract comes with terms that lay out what is — and isn’t — covered under your policy. Typically, the major terms of your contract might include:

The terms of a home warranty contract are often confusing and difficult to navigate, earning many companies in the industry a negative reputation.

Many buyers feel that their home warranty contract provides the company with too many opportunities to deny repairs or replacements. The risks are real; the home warranty company has a direct incentive to deny you coverage!

If you’re trying to navigate the terms of a home warranty contract and decide whether or not it’s right for you, check out our advice from industry veterans on how to get the most from a home warranty.

Is a home warranty worth it?

If you’re a home seller, you can offer a home warranty for your buyer to help close the transaction. Many home sellers purchase home warranties for exactly this reason.

As a buyer, the decision is more difficult. In most cases, a home warranty will end up costing more than the repairs and replacements it covers. However, if you know how to use it effectively and you’re lucky (or unlucky, depending on how you look at it), you can make the case for a home warranty.

Sellers should get a home warranty when:

• Competing listings offer it: When other sellers in your area offer a home warranty, you may have to offer one to stay competitive. As a seller, you’re only responsible for the monthly premium, so shop around for a lower rate and ask if there are discounts for paying the entire year up front.
• It’s necessary to close a deal: If your deal has a high chance of falling through because the perceived risk of appliance maintenance is too high, a home warranty can fill that gap. The exact circumstances of the deal may vary, but in most cases, it makes sense to spend a little to get the deal closed.

Buyers should get a home warranty when:

• It provides good coverage: Evaluate the contract and take notice of any exceptions like existing warranties or specific appliances. If there are any exceptions you don’t understand, contact the home warranty company directly, and avoid signing anything that’s unclear.
• It’s paid for by the seller: As a buyer, you only pay the home warranty company when you use it, so if the seller is covering the cost, take it. Keep in mind that this is a concession, and if you don’t plan on using the home warranty, negotiate for something else like a credit toward closing costs.
• You have limited access to credit: Credit can be used to distribute the cost of a home appliance over several months. However, if you don’t have access to credit, an appliance failure may cause substantial financial hardship. A home warranty is by no means the best solution, but it’s one way to offset this risk.

Be aware that home warranties carry serious risk.

Home warranties rely on the anxiety of first-time homeowners to offer the appearance of protection from unexpected expenses.

The business model is straightforward: a home warranty company markets its ability to get any repair done and lift the burden off of a buyer’s shoulders. When the time comes, it leverages its superior knowledge of recalls, warranties, and contractual exceptions to avoid providing services.

Home warranty alternative for buyers

Home warranties are usually not worth it for home buyers. If you're considering a home warranty, there are a number of cost-effective alternatives to protect you against expensive repairs.

One thing to note: if you decide not to buy a home warranty, you’ll be responsible for paying repair costs, including any costs to find and manage a contractor if needed. However, while this DIY is a bit more work, it may give you more control over the results and cost.

As an alternative to a home warranty, buyers can:

Save for potential repairs

Instead of paying your home warranty premiums out of pocket, set aside the money you would pay to prepare yourself for future repair costs.

The amount you pay over the course of a year for a home warranty policy — which is typically $300-600 — might be more than enough to cover the cost of any repairs that come up.

Additionally, the money you save doesn't go away at the end of the year, whereas if you don't use your home warranty during that time, you've wasted your money on premiums.

Get access to credit

Just because you don't have cash on hand, there are still ways to cover the cost of expensive and necessary repairs.

There are many options to finance the cost to repair or replace something in your home that would be covered by a home warranty. This gives you the flexibility to spread payment over a longer period of time.

Hire contractors directly

You may be able get higher quality service — and for a lower rate — by hiring contractors directly, as opposed to relying on the home warranty to coordinate repairs.

Choosing a contractor via a referral from friends and neighbors, asking for second opinions, and always discussing options will help ensure you choose a contractor that offers the best service. Furthermore, shopping around and comparing rates might lead to significant savings.

While it’s more legwork, the alternative is usually more affordable and produces better outcomes. A home warranty might not be a cost effective solution for small repairs, and as a homeowner, you are still on the hook for the service fee, even if the repair is denied. You also have less control of outcomes since you can only choose from preselected contractors, and the home warranty company dictates the repair and replacement parameters for your appliances.

How does a home warranty work?

With a home warranty, the expectation is that if something breaks in your home and it’s covered, the home warranty provider will send out a technician and take care of the problem. Sometimes, that’s exactly what happens. However, the home warranty company has every incentive to deny coverage and service which leaves the policyholder with a broken appliance and a bill for calling the technician.

In the best-case scenario, the home warranty process is simple:

• Customer places a call to report a broken appliance and pays a small service fee
• The home warranty company finds a contractor and sends them to the customer’s home
• The contractor fixes the appliance, or
• The home warranty company replaces the appliance, and
• Customer is happy because repairs had little to no out-of-pocket costs

This scenario can be hindered by several factors, including costs, terms, coverage, exceptions, and customer service. Your personal experience will vary depending on your home, your location, and the home warranty company you work with. You can avoid some less-than-positive outcomes by understanding exactly what can go wrong with a home warranty claim.

What can go wrong with home warranty service?

Using a home warranty can be a negative experience for some homeowners. Overpaying for service, major exceptions, and poor service quality are common issues. Purchasing a home warranty to cover routine maintenance is not worth the price unless average repair costs are very expensive in your area or the seller is paying your monthly premiums.

High costs

• What goes wrong: The overall or service call cost is higher than the repairs would have cost out of pocket.
• Prevention: Before contacting the home warranty company, call a local contractor for a free estimate to gauge the overall cost of repairs.
• On the bright side: If the high cost of the home warranty makes it not worthwhile for you, at least that means you didn't have anything major break!

To evaluate the cost of a home warranty, use the national average for repairs:

If the seller paid for your home warranty, the average cost of a service call is lower than the average repair cost. However, if you’re paying the monthly premium yourself, you must go through well over a dozen average repair calls to justify the cost.

Repairs aren’t covered

• What goes wrong: It sounded like everything was covered, but the contract allows the home warranty company to avoid providing repairs.
• Prevention: Read the contract thoroughly, and get on the phone with the home warranty company to discuss anything that isn’t 100% clear.

If an appliance breaks and you have a home warranty, the service company is expected to send someone to your home and make repairs for a predetermined cost. In practice, there are exceptions written into your home warranty contract, and some of them may prevent you from getting coverage.

Home warranty policies:

• May not cover really expensive repairs: Coverage limits may cap the amount a policy can pay out. In the event that it does, you’ll be on the hook for any additional costs.
• Only cover certain types of damage: Normal wear and tear is often the only coverable damage type. So if you break something by accident, or if the warranty company decides the damage doesn't fit this criteria, your repair wouldn't be covered.
• May work to deny claims: Because you have to choose a contractor off their list, you may get someone that’s more likely to deny a claim. If the list is very limited, you may not have access to the best contractors in your area, which can impact the quality of work.
• Won't cover some appliances: If your appliance is determined to have preexisting conditions or is under its original warranties, it may not be covered. In this event, you still pay the fee to have a repairman come out and take a look, but the work won’t be covered by the home warranty.

Make sure you review your terms carefully and understand exactly what makes up an exception, pre-existing condition, or improper use before signing a contract.

Poor service quality

• What goes wrong: The contractor doesn’t show or does the repair poorly, or there is some lingering issue or damage because of the work.
• Prevention: If you can choose from an approved contractor list, do a little research on them first. Also, stay with the contractor while they perform work to minimize surprises.
• On the bright side: You know what local contractor not to call back for future work.

Service quality is a common complaint for home warranty companies. Part of this is inevitable because they work across a large geographic region with many different contractors. However, you can hedge against quality problems by digging into local reviews of the home warranty company before you get a policy from them.

How to get the most from a home warranty

Understanding what a home warranty is and how it works are key steps to deciding whether it’s a good option for you. Getting some practical insights from other homeowners and professionals can also add some insights and help you on the journey. We reached out to landlords, buyers, sellers, and providers to get you the most interesting stories of home warranties in action.

Benefits beyond repair and replacement

Dan Bailey, President of WikiLawn, shared a story with us about a home warranty company providing benefits beyond repair and replacement.

"We had an issue in our first year of owning the home where a freak power surge completely fried three different appliances in our kitchen — the fridge, the stove, and a window air conditioning unit. All told, these would have cost us thousands of dollars to replace. The home warranty helped us replace them for just the cost of the annual premium.

"It also allowed us to open an investigation and discover that the wiring was faulty. We brought a suit against the Realtor who sold the house, as it wasn't properly reported. They ended up settling, which was something I'm not sure would have happened if the home warranty hadn't documented everything so well."

Practical advice for leveraging home warranties

Christopher Burgelin, Real Estate Broker and owner of CallWeBuyHousesFast.com shared some wisdom based on over 600 home warranty policies bought and used by his company over the last 18 years.

According to Christopher:

• Only buy a home warranty if the house is more than 10 years old; newer homes won’t have enough repair costs to justify your premium.
• Use the 5th through 10th contractors on the list provided to you for service; home warranty companies usually rank contractors at the top of the list who are most likely to deny repairs.
• They are an excellent vehicle for small landlords. Simply indicate that the first $65 of a repair is payable by the tenant and offer them the phone and policy number.
• As an alternative, get a reliable handy-man, AC tech, and plumber, since that will make up most of the repairs.

Key takeaways

As a buyer, a home warranty can be a powerful tool if you take the time to evaluate your contract and use it effectively to save money on a large amount of regular repairs. As a seller, it’s a simple way to close a deal that might otherwise fall through due to older appliances. If you don’t plan on using it to its full potential, as a buyer, it is more likely to cause issues than resolve them.