Do You Need a Home Warranty?

When you purchase a home, even a home that isn’t new, there is a very good chance that you will be offered a home warranty as a safety net against expensive, unforeseen repairs. It may sound like a great form of financial protection—but is it really the safety net that homeowners expect? Let’s find out if home warranties are worth it.

What Is a Home Warranty?

A home warranty is not the same thing as homeowners insurance, which covers major perils such as fires, hail, property crimes, and certain types of water damage that could affect the entire structure or the homeowner’s personal possessions.

A home warranty is a contract between a homeowner and a home warranty company that provides for discounted repair and replacement service on a home’s major components, such as the furnace, HVAC, plumbing, and electrical systems. A home warranty may also cover major appliances, such as washers and dryers, refrigerators, and swimming pools.

Often homeowners insurance doesn't cover these components. Or, the cost of fixing them (while expensive) wouldn't meet the policy's deductible—the dollar point at which insurance coverage kicks in.

Most plans have a basic component that provides all homeowners who purchase a policy with certain coverages. Homeowners can also purchase one or more optional components that provide additional coverage at additional cost.

Home warranty companies have agreements with approved service providers. When something that is covered by a home warranty breaks down, the homeowner calls the home warranty company, which sends one of its service providers to examine the problem. If the provider determines that the needed repair or replacement is covered by the warranty, they complete the work. The homeowner only pays a small service fee, plus the money already spent to purchase the warranty.

What Does a Home Warranty Cost?

A home warranty costs several hundred dollars a year, paid up-front (or in installments, if the warranty company offers a payment plan). The plan’s cost varies depending on the property type—single-family detached, condo, townhouse, or duplex—and whether the homeowner purchases a basic or an extended plan.

The cost usually does not vary with the property’s age, unless the home is brand new, which increases the cost of coverage. The home’s square footage also does not affect the price in most cases, unless the property is more than 5,000 square feet. Separate structures, such as guest houses, usually are not covered by the basic policy but can be covered for an additional fee. However, garages should be included as a standard feature of a warranty.

In addition to an annual premium, home warranties charge a service call fee (also called a trade call fee) of around $60 to $100 every time the warranty holder requests that a service provider come out to the house to examine a problem. If the problem requires more than one type of contractor to visit (e.g., a plumber and an electrician), the homeowner may have to pay the service fee for each.

Having a home warranty doesn’t mean the homeowner will never have to spend a penny on home repairs. Some problems won’t be covered by the warranty, whether because the homeowner didn’t purchase coverage for that item or because the warranty company doesn’t offer coverage for that item. Also, home warranties usually don’t cover components that haven’t been properly maintained. (More about this drawback below.) Furthermore, if the warranty company denies a claim, the homeowner will still have to pay the service fee and will also be responsible for repair costs. 

The Benefits of a Home Warranty

Like all warranties, a home warranty is supposed to protect against expensive, unforeseen repair bills and provide peace of mind. For a homeowner who doesn’t have an emergency fund or wants to reserve it for other things, a home warranty can act as a buffer.

Home warranties also make sense for people who aren’t handy or don’t want to worry about tracking down a contractor when they have a problem. Warranties can also make sense for people with expensive tastes in appliances.

The subject of home warranties often comes up during the sale and purchase of a home. A home warranty can provide reassurance to a home buyer who has limited information about how well the home’s components have been maintained or—in the case of new construction—how well the home has been built. A warranty can also be helpful for people who have just depleted their savings to buy a home and want to avoid any additional major expenses.

For home sellers, offering the buyer a paid-up, one-year home warranty with the purchase may provide a measure of protection against buyer complaints about any discovered problems or defects that arise after the sale closes. However, providing a home warranty does not exempt the seller from the legal requirement to disclose any known problems with the home.

The Drawbacks of Home Warranties

Here are the key disadvantages of home warranties.

Maintenance Gray Area

One major problem with a home warranty is that it will not cover items that have not been properly maintained. What is considered proper maintenance can be a significant gray area and is the source of many disagreements between home warranty companies and warranty holders.

In a worst-case scenario, unscrupulous warranty companies may use the improper maintenance clause as an excuse to deny valid claims. In another scenario, the homeowner and the contractor who makes the house call may simply disagree over what constitutes proper maintenance.

Another common problem is that when a homeowner purchases a used home, it might come with a 10-year-old furnace that the previous owner did not maintain. At that point, no matter how well the new homeowner tries to care for the furnace going forward, the previous neglect can’t be corrected and any damage can’t be undone. In addition, warranties have numerous exclusions, as well as dollar limits per repair and per year.

Home warranties aren’t expensive compared to the cost of repairing or replacing most of a home’s important components, and this fact is one of a warranty’s major selling points. However, there may be many years when nothing at all breaks down or wears out in the home.

Opportunity Costs

In these years the homeowner gets nothing (except, perhaps, peace of mind) in exchange for her premium. If that money had been put into an emergency fund, it would’ve earned some interest at least. Also, a homeowner who tries to use the warranty and has the claim denied will probably feel like the money spent on the premium and the service call fee were wasted.

Home warranties do eliminate the need to find a contractor when something breaks. However, they also eliminate the freedom to choose your own expert—an independent contractor—if you want the warranty to pay for the repair or replacement. If you don’t like the contractor or the work that’s done, you’re stuck. Also, the homeowner may have little or no say in the model or brand of a
replacement component, though the warranty contract should provide for an item of similar or equivalent quality.

Furthermore, the whole process may be more complicated when a third party (the home warranty company) is involved than if a homeowner is dealing directly with a contractor.

The Bottom Line

A home warranty is not a perfect solution to the risks and hidden costs homeowners face. If a seller wants to give you one, it won't hurt, certainly. Before you purchase one, though, read the fine print in the home warranty contract and carefully consider whether the warranty is likely to pay off.

Homeowners/buyers who would feel more comfortable having a home warranty—as well home sellers who want to offer a warranty to a buyer—should also do careful research to find a reputable home warranty company that uses reputable contractors and will actually pay for legitimate repairs when they are needed.