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When a fire, hurricane or winter storm damages your home, homeowners insurance can help pay for repairs. But what happens when your heater stops working or your garbage disposal quits? Homeowners insurance doesn't pay when an appliance fails, but a home warranty might. A home warranty plan is a service contract you purchase to repair or replace built-in appliances and systems when they break down in the course of normal use. Because these plans usually have lots of limitations, it's important to understand what is covered before you buy.
How Does a Home Warranty Plan Work?
A home warranty is an agreement for "the service, repair or replacement of major, built-in household appliances and systems on existing homes due to normal wear and tear," according to The National Home Service Contract Association (NHSCA), a nonprofit association for home service contract providers.
Homeowners insurance protects you from liability and your home's structure and contents from perils such as fire and theft. It doesn't cover normal wear and tear on your home or its systems, however. Home warranties do, which is why they are often promoted as a complement to homeowners insurance.
To give you peace of mind when you buy an existing home, sellers often throw in a home warranty. When the warranty that came with your home runs out, you may choose to renew it. You can also buy a home warranty on your own at any time from a variety of providers.
If an appliance or system covered by your home warranty fails, you'll contact the home warranty company, which sends out a local service company. You'll pay a service fee, generally ranging from around $35 to $100 depending on your contract. If the repair person and the insurer determine that the problem is covered by your warranty, the home warranty company pays for repair or replacement up to the limits of your policy.
What Does a Home Warranty Plan Cover?
Although specifics vary depending on your plan, provider and location, standard home warranties typically cover:
- Heating system
- Electrical system
- Water heater
- Garage door opener
- Garbage disposal
Many home warranty companies let you buy coverage for air conditioning systems, refrigerators, washers and dryers, spas and swimming pool pumps at additional cost.
Home warranties generally don't cover your home's structure, foundations, walls or workmanship. (In new homes, the builder may warranty these elements for a certain period.)
Home appliances and systems usually aren't covered by a home warranty if:
- They aren't listed as covered in your home warranty contract
- The failure is due to a condition that existed before your coverage took effect
- The failure is due to anything other than normal wear and tear
- The item was installed incorrectly
- The item was modified
- You tried to repair the item yourself and made the problem worse
Benefits and Drawbacks of Home Warranties
Home warranties have some potential benefits. If your problem is covered, the home warranty company will pick up most of the bill—you'll just need to pay the service fee. A home warranty can also provide a "one-stop" solution to home repairs. Instead of searching for an electrician or plumber on your own, just call the home warranty company to have it taken care of.
However, home warranties also have some drawbacks.
- Caps: Companies may cap coverage for each item at a certain dollar amount, which may not be enough to cover the cost of replacement or repair.
- Restricted options: The home warranty company selects the contractor used for diagnosis and repair; in most cases, you can't choose a contractor yourself.
- Service fees: You'll pay a charge for the service technician, even if the warranty claim is ultimately denied.
- Limited reimbursement: Some home warranties cover only the current, depreciated cost of an item, not its full replacement value. When appliances or systems are replaced, it will be with a comparable model, which may not be the same make or model you had. If a 10-year-old appliance breaks down, you might prefer to replace it with the latest model (with all the bells and whistles), but you generally won't have that option as part of your warranty.
- Exclusions: Home warranties typically have many exclusions. For example, a covered problem with your heating system might be denied unless you have documentation that maintenance was regularly performed according to the manufacturer's specifications. A plan that covers your refrigerator may not cover the fridge's icemaker.
How Much Does a Home Warranty Cost?
The price of a home warranty policy varies based on the company you buy from, what your policy covers and where you live. The NHSCA estimates a basic policy costs $400 to $550 annually; American Home Shield, a popular home warranty provider, says its plans cost on average from $500 to $700 per year.
Is a home warranty worth the price? New systems or appliances may already be covered by a manufacturer's warranty, and you can generally buy extended warranties for new appliances if desired. Some credit cards extend the manufacturer's warranty if you pay with the card (and even if you use your card's rewards to pay).
Before buying a home warranty, carefully read the detailed terms and conditions. Understand what appliances and systems are covered and under what conditions. Contact the Better Business Bureau and your state's consumer protection agency to see if there are any complaints against the company.
Even if you read the home warranty's terms and conditions, it can be difficult to know if the policy will pay out until you have a claim. Instead of spending money on a policy you may never use—or that may never pay out—it could make more financial sense to put the money into an emergency fund or home maintenance account. Then if an appliance or system in your home fails, you can tap your own funds, use a contractor of your choice to fix the item and, if it can't be repaired, purchase the replacement product you want.
Financing Home Repairs
Saving for home maintenance and repairs should be part of every homeowner's budget. If you need a major repair—such as re-piping your entire plumbing system—taking out a home equity loan, home equity line of credit or personal loan is another way to finance the project. Checking your credit report and credit score regularly helps to ensure your credit is always in good shape, which makes it easier to get a loan should you need one.