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What Is A Home Warranty And How Does It Work?

Victoria Araj5-Minute Read

September 21, 2021

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When you purchase a home, there are several expenses you may expect: a down payment, closing costs, moving expenses, home inspection fees, etc. You typically plan and save for these costs because you know they’re coming. But you quickly learn about all of the unexpected expenses, too – usually when a major appliance or essential system in your home breaks and you need to shell out a large amount of money in a short amount of time to have it repaired.

If you’re not prepared, these small emergencies can turn into big problems for your finances. And if you can’t afford to fix the issue right away, you could add further damage to your home. That’s why it’s important to protect your possessions and your finances from unforeseen circumstances – whether you’re an experienced homeowner or a first-time home buyer. Several measures can be taken to do this, one of which is the purchase of a home warranty.

What Is A Home Warranty?

A home warranty is a service contract that covers the cost of the repair or replacement of critical systems and appliances in your home. These may include your ventilation and air conditioning system, plumbing, electrical wiring, refrigerator, water heater, washer and dryer, oven and dishwasher.

A home warranty is different from homeowners insurance, which covers the cost of damage to your home and other structures, theft of your personal items and lawsuits or claims against your property. While home insurance tends to be required by mortgage lenders, home warranties are optional.

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How Does A Home Warranty Work?

Interested in getting a home warranty? Here’s how the process goes, from purchasing a plan to getting a repair or replacement:

  • Purchase a home warranty from a reliable company. Home warranties can be purchased at any time for any home. Sometimes the person selling a home will purchase a home warranty for the buyer as a bonus selling point. However, warranties are usually purchased by a home buyer shortly after the real estate transaction is finished.

  • Renew your home warranty every year. Home warranty contracts typically last 1 year, though you may find some that last up to 3 years. Once your contract expires, you’ll need to renew it or purchase a new warranty from another company.

  • Use your warranty for repairs or replacements of covered systems. When your covered item breaks down, you’ll call your warranty provider, not a repair business. Once you speak to your provider, they will call a third-party service they partner with and request the repair for you. The technician will then call you to schedule an appointment.

It’s important to know that many home warranty companies charge a service call fee (occasionally called a trade call fee), which is not covered and will be an out-of-pocket cost. This charge acts like a deductible for an insurance policy. If the repair ends up costing less than the service call fee, then you’ll probably only pay the smaller amount.

Each time you request assistance, you’ll be charged a service fee based on the number of appliances or systems that need repairs. Imagine that you have a broken air conditioner and a leaking dishwasher, and you find out the manufacturer’s warranties are no longer valid. You call the home warranty company instead and they will cover the repairs, but you’ll be charged two separate fees, even if you only made one call to the service provider. That’s because they’ll most likely have to use two different repair businesses to fix your items. 

What Does A Home Warranty Cover?

Just as there are different insurance policies, there are also different home warranty plans, in which costs and coverage may vary. The best home warranty company for your situation depends on your needs and wants as a homeowner.

There are typically three types of home warranties: one that covers a specific appliance, one that covers a variety of appliances and one that covers several appliances and critical systems in your new home. Keep in mind, not all appliances or systems will be covered under a home warranty.

Here are the types of appliances and home systems that are usually covered in basic plans.

Home Systems

Expect these major home systems to be covered under a home warranty:

  • Plumbing
  • Electrical systems
  • HVAC, heating and cooling systems
  • Septic (sometimes)

Major Appliances

Here are some examples of the different kinds of appliances that can be covered under a home warranty:

  • Range and oven
  • Water heater
  • Garbage disposal
  • Ceiling fans
  • Dishwasher
  • Furnace
  • Air conditioner
  • Refrigerator (sometimes)

Add-On Coverage

There are several appliances or home fixtures that are not covered by basic plans but that can be included by purchasing additional coverage. Optional add-ons can be bought separately for things like:

  • Washer and dryer
  • Swimming pool
  • Second refrigerator
  • Garage door openers
  • Hot tub
  • Well pump

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What Is Not Covered By A Home Warranty?

Home warranty plans have their limits on what they’ll cover and how much they’ll pay. Most home warranties offer payments up to a certain amount, typically $2,000 – $3,000 per year, depending on your plan. Any repair or replacement costs past the yearly limit must be covered by the homeowners. As for what the provider may not cover, here are a few examples:

  • Windows, walls and doors
  • Sprinkler systems
  • Appliances that are already in poor condition

For an item to be eligible for coverage, the failure must be due to normal wear and tear or an unforeseen defect. The warranty provider can deny a claim on items that were covered for a few reasons. Here are some examples of situations in which your provider may reject your claim:

  • The appliance was not properly installed.
  • You did not properly maintain the appliance or system.
  • There are code violations.
  • The issue is nonmechanical.
  • There is a preexisting condition.
  • The problem is not a result of normal wear and tear, but something else.
  • The wear and tear on the appliance or system is unusual.

Be aware, too, that some home warranties will cover an appliance, but not all of the parts included in the appliance. For example, a home warranty may cover your refrigerator, but not the ice machine that comes with it. Make sure you read the fine print of your warranty to understand what is and isn’t covered.

How Much Does A Home Warranty Cost?

The average cost for a basic home warranty plan ranges from $350 – $600 per year. However, the actual cost of a home warranty will depend on several factors, including the type of plan you purchase and whether you opt for additional coverage, which can add a couple hundred dollars.

Remember, you may also incur a service call fee anytime you need to request a repair or replacement. This usually runs $50 – $100 per request. The more service requests you have, the more you’ll pay in these additional fees. Some plans will allow you to choose the amount for your service fee, which can impact how much you pay for your plan. For instance, if you agree to pay more for a service call, you may pay less monthly.

Do You Need A Home Warranty?

All appliances and home systems have a lifespan and, like it or not, there will most likely be a time when you’ll need to replace a kitchen appliance or make an upgrade to a key system in your home.

But does that mean you need a home warranty right now and for all the things? Not necessarily. Here are a few factors to consider when thinking about whether you should get a home warranty and what you should cover:

  • Your experience maintaining a home
  • Your ability to pay out of pocket for repairs and replacements
  • The plan’s fine print regarding coverage
  • The age of your appliances and home systems
  • How much you value peace of mind
  • Your commitment to properly maintaining and caring for covered appliances
  • The presence of preexisting conditions
  • Your willingness to work only with the companies that partner with your provider
  • The potential for coverage on certain items from other sources (like a builder)

The Bottom Line

Buying a home warranty might not make sense for every buyer and seller, but for many people, the peace of mind that comes with purchasing or selling a home with a warranty plan is enough to justify the expense. Those new to home ownership may also be highly cautious about future emergency repairs and a warranty policy can give them added financial security.

If you’re in the home buying process, speak to your real estate agent and let them know you are interested in purchasing a warranty plan. They’ll be able to give you some advice and recommendations on how to research available options for coverage that will best suit your situation.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.