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How Does a Home Warranty Work?
By Chris Ozarowski MONEY RESEARCH COLLECTIVE
If you have own a house, or hope to do so soon, a home warranty can offer protection against the cost of unexpected repairs.
Buying one is no substitute for homeowner’s insurance. That coverage is often mandatory and covers some of the more significant expenses that may result from damage by outside forces. By contrast, a home warranty is an optional addition that can help you to cover the cost of repairs to your home’s appliances and major systems.
So, how does a home warranty work, and should you get one? Find out below.
What is a home warranty?
A home warranty is an overarching financial product. It can protect one or both of your home’s major systems, such as its heating and cooling hardware, and its major appliances, including its fridge. It covers the cost of repairs to these components from what warranty companies describe as normal wear and tear.
If you have recently bought a house, a home warranty may have been purchased by the previous owner as a part of the selling process. Home warranty companies often offer limited home warranties to sellers while their home is on the market. No upfront charge is made, but the company is then paid a portion of the seller’s proceeds once the home is sold.
This arrangement protects the homeowner from sudden expenses and gives them peace of mind if something in the house breaks during the sale.
That said, if no problems arise, as can be the case, the homeowner is still obliged to pay the warranty company their share of the proceeds.
A potential perk to selling your home?
Even if you don’t collect on your home warranty during the process of selling your home, the policy may have served as an attractive perk to help attract would-be buyers.
That’s because, once a house with a limited seller’s home warranty is sold, the coverage is transferred to the new owner, and often lasts up to one year. Once that time is up, the new owner must decide on coverage. The options are to renew the home warranty, let it expire or pick another home warranty provider or coverage plan.
Most home warranty companies do not require a recent home inspection before allowing you to sign up. Some providers, though, do mandate that specific systems, such as the HVAC one, be inspected or maintained annually in order to sustain the warranty coverage.
How a home warranty works
There are several types of home warranty plans, each with different coverage areas. In addition, each home warranty company may have its own limits on coverage. When researching a particular home warranty plan, read the company’s terms carefully to avoid unpleasant surprises.
Types of coverage
Home warranty coverage may cover either home appliances, such as washers and dryers, and major home systems, such as electrical and plumbing. Combination plans offer coverage for both. Add-ons are often available for items not usually covered by either plan type– such as pools, septic systems and standalone freezers.
Major home systems
A major home system protection plan may cover the following:
- Air Conditioning
- Heating System
- Water Heater
- Electrical System
- Plumbing System
- Ductwork
Major home appliances
Home warranty appliance replacement plans may include coverage for your:
- Clothes dryer
- Washing machine
- The main refrigerator
- Oven
- Range
- Dishwasher
- Garbage disposal
- Garage door opener
Combination plans
A combination plan provides coverage for several major systems and appliances. Home warranty providers may offer multiple tiers of combination plans, with the priciest premium plans covering a larger selection of items. Some providers may allow you to create a customized plan tailored to your needs.
Most providers offer add-ons for items not covered in their main plans. Possible add-ons may provide coverage for, among others:
- Pools and spas
- Sump pumps
- Well pumps
- Central vacuums
- Septic system pumping
- Stand-alone freezers
- Limited roof leaks
- Lighting fixtures
- Replacing keys
- Gutter cleaning
- Pest control
- Carpet cleaning
- Water softeners
- Lawn sprinkler systems
- Electronics
- Swamp coolers
- Ejector pumps
- Second refrigerators
- Trash compactors
- In-fridge ice makers
- Freestanding ice makers
- Wine coolers and fridges
- Saltwater pools
- Generators
- Plumbing fixtures
- Grinder pumps
- Water dispenser water lines
- Instant hot water dispensers
- Reverse osmosis water filter systems
- Professional grade refrigerators
- Professional grade ranges, ovens, and cooktops
- Professional grade dishwasher
- Professional grade microwaves
- Professional-grade washing machines
- Professional-grade clothes dryers
- Window cleaning
Service calls and charges
When an appliance or home system covered by your home warranty breaks, how does a warranty claim work? To start, you submit a service request to your home warranty provider. Home warranty companies may allow you to file service requests through their website or by calling a provided phone number.
You will then have to pay a service fee, sometimes known as a home warranty deductible. The usual cost is between $50 and $100. After you have paid the fee, the home warranty company will assign the task to a contractor. The contractor, in turn, will contact you to schedule a service appointment.
Many home warranty companies have their own list of contractors they send out to do repairs. Some, though, may allow you to pick your own contractor. However, if repairs were made without the provider’s approval, the costs may not be covered by the provider.
How repair coverage is determined
During the service appointment, the contractor will diagnose the problem and may forward the details to the home warranty company for approval. Once it is determined that your home warranty covers the fault, the contractor will repair or replace the system or appliance at no additional cost (above what you paid for the service call, which is not refunded, as a rule).
Sometimes contractors may need to order parts that are currently unavailable, in which case repairs may take some time. Your home warranty contract may include clauses about how long repairs should take and what happens if replacement parts are unavailable or no longer manufactured.
Sometimes a home warranty company may choose to replace a repair with a cash payment equivalent to the value of the faulty system or appliance. A warranty company may calculate the cash settlement value based on how much the repair would cost them. That might result in a cash settlement that’s less than you might have to pay to replace the system or appliance, especially with a new replacement.
Coverage limits
How does home warranty coverage work? Coverage limits vary from provider to provider, and your specific limits will be listed in your home warranty contract.
Home warranty providers may have dollar amount limits for repairs on specific systems or appliances or annual dollar limits for all coverage. For example, Home Warranty of America has a $5,000 limit on HVAC repairs and a $2,000 limit on electrical systems damaged due to rust.
While a particular system or appliance may be listed as covered in the home warranty plan, the home warranty contract may stipulate coverage limitations for several components.
For example, while Home Warranty of America’s Gold Plan includes coverage for ductwork, the following related items are not covered:
- Registers and grills
- Insulation
- Asbestos-insulated ductwork
- Flues
- Vents and breaching
- Ductwork exposed to outside elements
- Separation due to settlement and/or lack of support
- Damper motors
- Electronic, computerized, and manual systems management and zone controllers,
- Diagnostic testing of, or locating leaks to, ductwork including but not limited to as required by law, ordinance or regulation, or when required due to the installation or replacement of system equipment
Be sure to read your warranty contract carefully before filing a claim.
The limitations for pre-existing conditions
Problems that pre-date the start of the warranty are usually not covered by home warranty providers. Some home warranty providers, such as Landmark Home Warranty, may sometimes cover such “pre-existing conditions” if a home inspection was done before the start of coverage and no fault was found.
Finally, your home warranty provider may deny coverage if they believe the damage to the appliance did not occur from normal wear and tear. Reasons for potential rejection include improper maintenance or improper initial installation.
Monthly and yearly premiums
Depending on your home warranty provider, premiums may be paid monthly or annually. Some companies, like First American Home Warranty, only provide annual contracts. Certain providers that offer both options, such as Choice Home Warranty, provide discounts for customers who choose to pay premiums in a single, annual payment.
How long do home warranties last?
How long does a home warranty typically run? If the previous owner purchased your current home warranty as part of the selling process, the duration of that warranty is probably 12 months. Consult the warranty contract or contact your provider to ensure the exact expiration date.
Should I renew my home warranty?
If you’re approaching your home warranty’s expiration date, you must choose between renewing, letting the policy expire, or finding another provider.
The answer to the question “Should I renew my home warranty?” depends on your particular situation. On the one hand, a home warranty can provide protection from significant costs when important home systems or appliances break down.
But a warranty comes at a cost in premiums and (generally non-refundable) service-call fees. The premiums, in particular, typically run to hundreds of dollars per year. That’s money that could go a long way towards covering the typical repair costs you might incur to keep your home’s appliances and systems working. (For context, Consumer Reports found two- to five-year old fridges cost an average of only $160 or so to fix – and only one in four needed a repair in that time period.)
Also, due to the various limits and limitations of a home warranty, owning one does not assure coverage for every repair. Even if a repair is covered, the warranty company may deem one to be unfeasible – or undesirable. They may instead opt to give you the depreciated value of the system or appliance.
That amount is likely to fall short of the replacement cost. As a result, you might need to pay in full for the repair, with no help from the warranty company. Alternatively, you could choose to cover the difference between the provider’s depreciated settlement and the cost of a new appliance or system.
Peace of mind and a home warranty
If you’re prepared to live with the drawbacks to a home warranty, owning one might offer reassurance. For some people, owning a home can create worry over being unable to cover an unusually large big repair bill for an appliance or home system. You might prefer to pay a certain amount monthly for protection for those items rather than risk having to pony up a large sum in the event one of them fails.
If you are considering switching to another provider, study their policy. Some providers, like Choice Home Warranty, do not cover repair costs for breakdowns during the first 30 days of the coverage period. Time your switch so as not to leave your home uncovered for any period of time.
Just because your previous provider covered a home system or appliance does not mean every provider will cover it. Check the terms and conditions for the new provider, and compare those to the cost and scope of your previous coverage.
What happens if I reach my coverage limit?
If you reach your home warranty’s dollar amount coverage limit, any further repairs must be done at your expense. For example, if the repair cost of an item is $1,500 and the home warranty’s coverage limit is $1,000 for that item, you will have to cover the remaining $500 yourself.
What contributes to home warranty costs?
How much will a home warranty cost you? Home warranty coverage costs are split between the premium payment(s) and service-call fees. As service fees are charged for every repair, the total annual cost of your home warranty depends on the number of repairs you need that year.
Warranty provider
According to Choice Home warranty, annual or monthly premiums are based on the size, type and location of your home. Home Warranty of America states that the average annual warranty premium costs between $350 and $650.
When looking for a home warranty, research multiple providers to find the best fit for you, as different home warranty providers may offer you different quotes for a basic plan.
Levels of coverage
Levels of coverage may vary per home warranty plan. The more a plan covers, the more expensive it usually is. Add-ons for items not covered by the provider’s basic plan will also add to the cost of your home warranty. According to HWA, extended coverage add-ons usually add between $100 and $500 to home warranty costs annually.
When considering add-ons, review the warranty provider’s coverage limitations to avoid unpleasant surprises. It could turn out that the particular components of a system or appliance you are most worried about are not covered.
Service-visit fees
Home Warranty of America says average service visit fees cost between $50 and $100. To minimize costs, review coverage limits before requesting a service visit, and make sure you are at home during the scheduled time. Service visit fees are usually non-refundable, even if the warranty provider denies coverage or the contractor cannot access the property.
Home warranty key takeaways
Know how a home warranty works and how to use home warranty services? You can now make informed choices. Do some research and reflection before deciding whether to buy or renew a current home warranty plan or sign up for a new plan with a different provider.
Always read the provider’s coverage terms when signing up for a home warranty plan or requesting service.
When comparing the costs of different home warranty plans, consider the cost of add-ons and service call fees. A company with cheap premiums but expensive service call fees may end up costing you more in the long run if and when repairs need to be done.
And in general, consider how able you are to cover a typical appliance repair, of say a few hundred dollars, on your own. If you could handle such an expense, it may not pay to get a home warranty.
That said, a warranty may make sense if you could not handle the financial hit from such a repair, and worry about incurring such expenses. In that case, you may prefer to pay the premiums for a warranty for the peace of mind that a repair expense might be covered, at least in part. (An alternative if you’re financially disciplined: bank what you would pay in premiums to create a home-repairs fund you can draw from as needed.)
If you’re still game to buy a home warranty, and want to see our best picks and how they stack up against one another, take a look at our Best Home Warranties.