Is a home warranty worth it?

What is a home warranty?

A home warranty is a service plan that any homeowner can sign up for. Typically, you’ll pay for a yearly contract and choose a plan to cover appliances, systems or a combination of the two. If any item covered in the plan breaks down, you’ll file a claim with the warranty provider. The company will then send a technician out to repair or replace the item.

Your monthly payment and specific terms of the contract will vary depending on the provider and what type of service plan you choose. Keep in mind that a home warranty is not the same as homeowners insurance, which provides coverage for the structure of your house and certain perils, such as theft, vandalism or fire.

» LEARN MORE: What is a home warranty?

How does a home warranty work?

A home warranty helps cover costs to repair or replace certain systems and appliances in your home when they break down. The contract usually lasts for one year, but some companies offer multi-year plans for a discount or month-to-month plans with no commitment.

When you file a claim, you contact the home warranty company and it sends out a contractor from its network. You pay a service call fee (usually $75 to $150), which is specified in your contract. As long as the repair is covered under the terms of your agreement, the contractor makes the repair or replacement, and the home warranty company pays for the cost.

Home warranty contracts do have payout limits and restrictions, which is why it’s important to read the fine print carefully before you sign up. Here is what’s typically covered and not covered.

How much does a home warranty cost?

A basic home warranty typically costs between $450 and $600 per year and can often be paid monthly, with an average monthly cost of $40 to $60. In addition to the yearly cost, there are also service call fees charged by home warranty companies each time a repair is needed, typically ranging from $75 to $150.

The cost of the home warranty can vary based on several factors, including:

• Level of coverage: Home warranty plans typically offer different levels of coverage — higher levels of coverage cost more than basic plans. Comprehensive coverage costs between $1,200 and $1,400 per year.
• Age and condition of the home: The age and condition of the home can affect the cost of a home warranty. Older homes or homes with older systems and appliances may have higher costs due to a higher likelihood of repairs or replacements being needed.

It's important to compare the cost and coverage of different home warranty plans from different providers to find the best option for your needs and budget. Some home warranty providers may offer discounts or promotions, so it's also a good idea to ask about any available deals.

» MORE DETAILS: How much does a home warranty cost?

What is the difference between a home warranty and home insurance?

A home warranty seems similar to homeowners insurance, but there are key differences. Warranties cover breakdowns of appliances and systems caused by normal use, while insurance covers damage from perils.

A home warranty is never required by law.

• Home insurance coverage: Applies to damage and loss caused by natural disasters or unexpected events (fire, storms, theft, vandalism, etc.) and covers your liability if someone is injured on your property.
• Home warranty coverage: Applies to appliance and system breakdowns from routine use.

For example, if your air conditioner suddenly stops working, you can call the home warranty company and it will send someone to fix it or replace it. But if your air conditioner is damaged in a fire, you would call your insurance company to pay for a replacement.

If you have a mortgage, the lender will require you to purchase a home insurance policy. Home warranty plans, however, are always optional.

» MORE DETAILS: Home warranty vs. home insurance

Is a home warranty worth the money?

Whether a home warranty is worth the money “ultimately depends on your individual circumstances and the age and condition of your appliances and systems,” according to David Light, chief development officer at Land Broker Co-op. Often, it’s worth it in a couple of scenarios:

• When you’re selling an old home: Incentivizes potential buyers because it guarantees the home's systems and appliances.
• When you’re buying a new home: Financial protection during the first year of homeownership, when unexpected repairs can be costly.

Even if you’re not in the middle of buying or selling a home, a warranty can be worth the cost if you have an older house. If you haven’t been able to update several of your appliances or systems, they could easily break down. Unless you have a sizable emergency fund, you could be spending thousands to replace these items.

According to Eddie Martini, a strategic advisor at Real Estate Bees, warranty plans can be a great investment for homeowners, “especially a first-time homebuyer who may not be used to having unexpected expenses like an oven needing to be replaced or bigger-ticket items like an HVAC system."

Martini continued: “Once you start to see that the cost of a home warranty would be a fraction of these big-ticket appliances, you see the value in transferring that risk to the home warranty company."

On the other hand, Light said it's worth noting that home warranties aren’t always worth the cost: “It may not be necessary if you have newer appliances or a larger emergency fund.” The cost of a home warranty will likely outweigh the benefit if you don’t need major repairs.

You should probably skip it if you’re buying a brand-new home with new appliances that are under a manufacturer’s warranty or you already have enough savings to pay for repairs and replacements out of pocket.

» CHECK THE NUMBERS: Home maintenance costs

Home warranty pros and cons

Appliances can break down, pipes can burst, and HVAC systems can malfunction, leaving you with unexpected repairs or replacements that quickly add up. In the best-case scenario, you have a home warranty to cover the expenses.

One of the potential downsides is that repairs can take a long time. A ConsumerAffairs reviewer in Texas got coverage for their washer and dryer, and the company “gave us back $1,300. We still had to put $700 out of pocket on the replacement, but it was better than nothing. The only thing was the process was a little bit painful and it was too slow.”

But what if the company doesn’t honor your claim at all? Then you’ve paid hundreds of dollars toward nothing. In some cases, you might be better off looking into alternatives to pay for home repairs, like a credit card, personal loan or home equity line of credit (HELOC).

Bottom line: Should I get a home warranty?

A home warranty can help homeowners on a tight budget by providing coverage for unexpected repairs, which can be especially important for major systems or appliances.

It also makes sense for home sellers to offer a home warranty as an incentive to potential buyers, as it can give buyers confidence in the condition of the home's systems and appliances.

However, if you’re buying a new house, it’s likely that your appliances are still under the manufacturer’s warranty. Still, you might consider getting coverage for your systems (heating, interior plumbing, etc.).

For some, it’s also worth it for the sense of security. You have to pay a little bit of money every month or every year for the warranty, but it can save you a lot of money in the long run if something in your house breaks and you need to get it fixed or replaced.

Like a lot of things, maybe you’d rather have one and never use it than need one and not have it.