One of Jim's friends recently bought a house and the purchase included a home warranty (they usually transfer on a home sale).
I don't know the specifics of the home warranty but he explained that it covered “everything.” I suppose the price of it was baked into the price of the home but to him it was free. He could cancel it after the warranty came up for renewal (hasn't happened yet) but he couldn't cancel it and reduce the price.
Turns out it was a good thing… a few months after he moved into the home, the outdoor unit of his HVAC system (a/c condenser) failed. And it failed in a way that could not be fixed (the unit was also quite old).
And the home warranty company replaced it.
And he was happy.
In his case, he didn't have much of a choice and the home warranty saved him a few thousand dollars. These outdoor units aren't cheap and you can't live without them in Maryland. (if you have one, remember to clean it!)
But what if you've been living in your home for a while and have a good handle on your major systems? Does a home warranty make sense?
How Do Home Warranties Work?
Home warranty plans are like an extended warranty for your household appliances and systems. They don't cover expenses related to your home structure like framing, siding, or the foundation. That's what homeowner's and renter's insurance is for.
Once the manufacturer's warranty expires, a home warranty can continue to cover repair and replacement costs stemming from “normal wear and tear.”
You're still on the hook for breakdowns caused by neglect, improper use, or a well-meaning toddler who was a little too helpful.
Home warranties can cover expenses that your homeowner's purchases won't because it's not part of the home structure. For example, a homeowner's insurance policy won't cover a broken water heater but a home warranty can. If your water heater fails in a way that causes flood damage, your homeowner's insurance may cover the flood damage caused by the broken water heater.
If a covered event occurs, you call the home warranty company to begin the repair process. You will pay the repair technician a service fee and you may pay any costs exceeding the per-claim coverage limits.
Who Can Get a Home Warranty?
If you own a house or are buying a house, you can get a home warranty.
It's quite common to be offered a home warranty when you buy a house. Real estate agents or the current homeowner may offer a home warranty if they are selling an older home.
You will need to let the home warranty company know which group you fall in so they draft they correct policy. In most instances, home warranties are transferrable to the new property owner too.
How Much Do Home Warranties Cost?
Like extended warranties, you pay a fixed price per year of coverage. You can expect to pay between $300 and $700 per year. Many companies accept monthly payments instead of the upfront lump sum. In this case, you might pay between $25 and $70 per month.
The exact plan cost depends on the warranty company and which coverage options you choose. Where you live can also influence the price. Cheaper plans usually cover fewer items and have lower coverage limits.
Choosing a more expensive plan means your technician service fees can be lower. The per-claim coverage amounts can also be higher.
Technician Service Fee
When you need to place a service call, you pay a fixed fee directly to the technician. Each service call can cost between $75 and $125 depending on what plan you choose. Choosing a higher monthly plan fee lowers your technician fee.
This should be the only fee you pay unless there is an expensive repair or there's defective equipment that must be hauled away.
If you didn't have a home warranty, a service call from a local provider can cost up to $200 and that's not even counting service costs. It's not uncommon for a service call in the Washington D.C. area to start with a $95 fee, which can go towards any service. And that's not even accounting for replacement parts and additional hourly labor costs. A home warranty can save you money when the repair costs are covered.
Ideally, the home warranty will cover the full repair cost but there are coverage limits for most items. One example is plumbing. For example, American Home Shield only covers the first $1,000 in eligible expenses. You're responsible for anything above that amount.
Home warranty plans don't replace the need for a home repair savings fund. Make sure you set aside some cash for your home's little surprises.
Home Warranty Plan Options
Similar to car insurance, you can choose as many (or few) plans as you wish. With car insurance, liability coverage is the base product that covers you for at-fault incidents. But collision, comprehensive, and roadside assistance cover expenses for other events.
Below are some of your potential home warranty plan options:
- Home systems: Heating and air conditioning, ductwork, smoke detectors, etc.
- Appliances: Cookstoves, refrigerators, washers, clothes dryers, etc.
- Optional items: Pool or spa, water softener, well pump, septic system, etc.
You can choose one plan or bundle the multiple plans. The home systems and appliance protection plans are the most common. For complete peace of mind, you may choose both.
Like any insurance product, you want to make sure you buy coverage for your most likely expenses. You must read the home warranty's fine print carefully for all possible costs and qualifying expenses. Each warranty company covers and excludes different items. The company should offer sample coverage terms when you get an online quote.
Less-common items can also qualify for a home warranty on an a la carte basis.
Some of the most common examples include:
- Home electronics (TV, laptops, video game systems)
- 2nd refrigerator
- Standalone chest freezer
- Pool or spa
- Equipment for the pool or spa
- Well pump
- Septic tank pump
- Water softener
- Guest house
Most warranties also require you to pay more for these services:
- Removal of defective equipment
- Building permits
- Corrections for building code violations and improper installation
It's common for home warranty companies to offer a basic plan and premium plan. The premium plan may cost an extra $5 a month.
As you expect, the premium plan costs more but covers more items and has higher coverage limits. For example, a basic plan may only cover the dishwasher door and shell. But the premium plan will cover the various moving parts. You must read the policy itself to see exactly what it covers so you aren't surprised if you use it.
Below is a brief overview of the eligible and ineligible expenses for different items.
Disclaimer: These are general guidelines that apply to most home warranties. Some plans cover more items than others. Your zip code also determines which items qualify for coverage. Check your policy to know for sure because it may differ from these general guidelines.
Air Conditioning and Ductwork
It's common for your home warranty to only cover up to $1,500 in repair costs.
- What's covered: Central air, mini-splits, geothermal, leaks or breaks in ductwork
- What's not covered: Window units, chillers, outside or underground piping
Heating and Ductwork
- What's covered: Forced air and ductwork (gas, oil, and electric), wall-mounted, electric baseboard, heat pumps, hot water or steam circulating heat, geothermal
- What's not covered: Portable units, fireplaces (even when the only heating source), fuel storage tanks, outdoor or underground piping for covered units
You may need to choose a premium plan to get electrical coverage.
- What's covered: Adequate wiring, plugs, circuit breakers, ceiling fans
- What's not covered: Power surges, inadequate wiring, face plates, intercom systems
- What's covered: Ovens, stoves, garbage disposal, microwaves, refrigerators, clothes washer and dryer
- What's not covered: Standalone freezers, wine chillers, multimedia centers
- What's covered: Pressure regulators, stoppages within 125 feet from the point of access, toilets, line breaks (except due to freezing and tree roots)
- What's not covered: Holding tanks, faucets, shower heads, caulking and grouting, saunas or steam rooms
In addition to the non-qualifying items above, home warranties won’t cover the following expenses:
- Labor for modifying your house or foundation to fit the replacement device
- Labor costs exceeding per-claim limits
- Repairs due to building code violations
- Disposal of defective appliances and systems
- Pre-existing conditions (i.e. the appliance or system in not in good working order when home warranty coverage starts>
Some warranty providers may provide optional coverage for the above expenses.
Once again, you will need to compare the cost and see what expenses they will cover.
Annual Coverage Limits
In addition to per-claim coverage limits, your warranty may only cover up to a specific annual dollar limit. For instance, the first $15,000 in eligible yearly expenses qualify. But there can be a single claim or individual category limit.
You pay any remaining costs above these limits.
It's the homeowner's responsibility to maintain the covered items regularly. Actions can include changing the air conditioner filters, cleaning exhaust lines, and repairing cosmetic damage.
You may need to submit proof of maintenance records to submit a qualifying claim. Each warranty has a different policy so review when you get a quote.
Item Neglect and Abuse
If the technician determines the damage isn't from normal wear and tear, you are liable for the entire service bill.
Property Modifications for Replacement Devices
You may need to pay the labor and parts fees if the technician must modify your property to install a replacement item. An example is adding new exterior pipes or expanding the foundation to install a replacement outdoor air conditioner unit.
Acts of Nature
Damage stemming from acts of nature like flooding, fire, soil movement, and earthquakes may require a homeowner's insurance claim.
If you're a landlord, a single home warranty can be used for multifamily properties. Although you will need to see how many units and what items are eligible.
When to Get a Home Warranty
There are a lot of good reasons to get a home warranty, including:
- Anticipate annual repair costs to exceed the home warranty fee
- Your appliances and home systems manufacturer's warranty have expired
- The appliances and systems are still “new enough” to qualify for coverage
- Want peace of mind
This is not a “good” reason but if you spent a little more than you should've on a house, depleting your cash reserves, a home warranty can be a mini-insurance plan you don't fall into a debt hole to repair something.
When Not to Get a Home Warranty
There are situations where a home warranty isn't worth it, such as:
- You can complete most repairs yourself
- Can afford repair costs from your savings
- Expect most costs to be ineligible or covered by homeowner's policy
- Live in a newly-built home under a manufacturer's warranty
Only you know, given your expertise and financial situation, which is best for you.
How to Buy a Home Warranty
First, get a free online quote from at least three home warranty companies. Their quote should clearly state the covered and non-covered expenses. You should also see a sample coverage plan with the terms and conditions for your location. American Home Shield, Choice Home Warranty, and Cinch Home Services are three popular companies that offer warranties.
After choosing a plan, the home warranty company may require a home inspection. An inspection can also be required if you add an item within 60 days of your policy start date.
When your policy starts, be sure to follow the terms and conditions. Perform routine maintenance and keep proper documentation as required.
Is a Home Warranty Worth It?
Home warranty plans are an optional protection plan. They can provide additional peace of mind by potentially saving you thousands of dollars in-home repairs. However, the potential savings may not be worth the plan fee if you can afford a major repair.
The comes down to how much it costs, how old your most expensive systems are (older is more likely to break), and what the policy covers. In the case of Jim's friend, it saved him a ton of money and the policy did its job. In many cases, if nothing breaks, the policy “isn't worth it” because you don't get more value than what you paid into it. For those cases, you can't see the future so it's impossible to know whether it's worth it.
But what you did get for your money is the peace of mind of knowing you're covered.