Should You Pay for a Home Warranty?

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Whether you’re buying a house or already own one, a major repair bill might bust your budget — perhaps for months to come. A home warranty, however, can cover these costs.

Although warranties can be a lifesaver, they’re not cheap, and they don’t cover everything in your home.

Here’s everything you need to know about home warranties and whether they’re worth it or not:

• What is a home warranty?
• What home warranties don’t cover
• How much do home warranties cost?
• Pros of home warranties
• Cons of home warranties
• Should you get a home warranty

What is a home warranty?

A home warranty is a service contract for your home’s systems and appliances. It covers some of the cost of HVAC, electrical, and plumbing system repairs as well as repairs for major appliances, like your refrigerator and washer and dryer. In the event the item can’t be repaired, the home warranty provides a replacement or cash payment.

Home warranties differ from homeowners insurance policies. Whereas mortgage lenders require homeowners insurance as a condition for home loans, a warranty is strictly optional. Here’s what the two products will help you cover:

• Homeowners insurance: Covers the structure of your home and your personal property against unexpected damage from covered perils such as a fire or storm
• Home warranty: Covers home systems (or components of those systems) and appliances that fail due to normal wear and tear

When you purchase a home warranty, you’ll sign a contract that specifies the items covered, and under what conditions — some only cover appliances and systems that have been properly maintained. Though the warranty will cover the cost of repairs, you’ll still be required to pay for service and plan fees out of pocket.

Learn More: 10 Mistakes to Avoid as a First-Time Homebuyer

What home warranties don’t cover

A home warranty is designed to cover repair and replacement for certain appliances and systems as they wear out and generally won’t cover any pre-existing conditions. It won’t cover damage or loss from theft or fire — your homeowners insurance covers those. The structural features of your home, such as the roof or windows, usually aren’t covered either.

The following table lists common repairs and whether a home warranty is likely to cover them categorically.

How much do home warranties cost?

The annual cost of a home warranty depends on the level of coverage you purchase and your location. Some companies charge the full amount up front, while others bill you monthly.

Here’s typical cost ranges for plans that cover:

• Appliances or systems: $480 to $900, depending on where you live
• Both: $600 to $1,000 per year

Service call fees are usually extra. Typical fees range from $60 to $125. Some companies, such as American Home Shield, charge slightly less for the warranty if you opt into a higher service fee — or slightly more if you select a lower service fee.

Find Out: How Much Does It Cost to Buy a House?

Pros of home warranties

A home warranty can give you peace of mind by paying for costly home repairs. Here are some other reasons to consider one:

• Service providers are vetted by the home warranty company
• If you have older appliances or equipment that might need to be repaired or replaced within the next few years, a warranty could save you thousands of dollars in costs, just make sure that item is actually covered under your plan
• The home warranty company does all the work — you call to report the problem, and the warranty company handles the rest

Cons of home warranties

Handing over the reins to a warranty company has potential drawbacks. Here are some of the most common issues homeowners encounter:

• Some contracts only cover items that have been properly maintained, and most have complex restrictions that bear close reading of the terms
• You might not be able to use your own service provider (unless they’re authorized by the warranty company)
• The warranty company decides whether equipment will be repaired or replaced
• You might have trouble contacting the warranty company and getting a service provider out to your home, which could delay the service
• There’s usually claim caps — meaning you may only get a small fraction of the cost to replace an appliance that has kicked the bucket, leaving you on the hook for a potentially costly bill

Keep Reading: How to Make an Offer on a House

Should you get a home warranty?

A home warranty might be a good choice if the peace of mind it provides outweighs the cost of the contract.

If you live in an older home with original HVAC equipment and appliances, a home warranty may be a good idea, as long as you make sure there are no capacity or installation issues that could exclude your system from coverage. In the event of a home sale, a warranty can ease the buyer’s concerns about possible home repairs.

A home warranty might not make sense if:

• You’ve recently purchased a new construction home
• You have newer appliances under manufacturer warranty
• You’d rather choose and work with your own contractors rather than the warranty company’s options

If you decide to forgo a home warranty, consider establishing a home-repair fund to pay for unexpected repairs. This will keep you from wasting money on a warranty if repairs aren’t needed.

About the author

Daria Uhlig

Daria Uhlig is a contributor to Credible who covers mortgage and real estate. Her work has appeared in publications like The Motley Fool, USA Today, MSN Money, CNBC, and Yahoo! Finance.

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