Home Warranty Policies: Worth the Cost?

The benefits of homeownership are numerous. But so are the costs. According to mortgage data firm Black Knight, the average American home's mortgage principal and interest payment consumes 31% of the median household income. So, if something goes wrong, your budget may suffer as well.

A home warranty can give you peace of mind that if your dishwasher breaks down or your air conditioner breaks down in the middle of August, repair and replacement costs will be covered.

However, a home warranty is an additional line item in a monthly household budget that also includes homeowner's insurance, property tax, and utilities — on top of a mortgage payment that consumes one-third of a family's income.

The decision to purchase a home warranty is a personal one: would you rather pay a monthly fee for protection that you might not require? Or would you rather save the money but risk having to pay thousands of dollars for a major household repair on the spot?

The answer is dependent on your needs and lifestyle, and several factors are at work. Here's what you need to know to determine whether a home warranty is right for you.

How a home warranty works

A home warranty is a contract between a homeowner and a warranty company that provides service, repair, or replacement on a home's major systems and appliances. It is not to be confused with a homeowners insurance policy. A home warranty can supplement homeowners insurance, but it is not a replacement.

Pros of a home warranty

  • Cost savings. One significant benefit of home warranties is that you may be able to save thousands of dollars on costly home repairs. If you don't have an emergency fund, this can be a significant benefit.
  • Convenience. Because home warranty companies choose their own service providers, a warranty can save you the time and effort of finding a contractor when you need one.
  • Contractor accountability. Several home warranty companies guarantee a response time of 48 hours and a 30-day labor guarantee.
  • Fills in homeowners insurance gaps. Homeowners insurance does not typically cover the types of things that a home warranty does. Furthermore, the cost of repairing or replacing covered systems is unlikely to exceed the policy's deductible. A home warranty can provide an additional layer of protection.
  • No DIY necessary. If you're not much of a do-it-yourselfer, a home warranty may be a good option to keep you from breaking out the toolbox.
  • They are reasonably priced. Home warranties can be purchased for as little as $30 per month.

Cons of a home warranty

  • Service and premium fees. Regardless of whether you use your home warranty contract, you will have to pay an annual, quarterly, or monthly premium. You must also pay a fee each time you request service, even if the technician is unable to repair the problem.
  • Claims may be rejected. The home warranty company may refuse to repair appliances that they believe have been improperly maintained, or if the company determines that the damage was caused by your own negligence.
  • Not everything is covered. If the electrical system in a detached structure, such as a guest house or garage, fails, your home warranty may not cover repairs unless you have paid for a policy upgrade.
  • Homeowners have a limited selection. With home warranties, the "you get what you pay for" rule is very much in play. Warranty companies only allow specific service providers to perform repairs, so you won't be able to rely on your regular plumber or electrician. You may also be unable to select the brand of appliance you want if a replacement is required.
  • Repair costs are restricted. Most homeowner policies specify how much they are willing to pay to repair or replace specific systems and appliances. As an example, if the policy limit for a washing machine is $800 but a new machine costs $1,200, the homeowner must cover the $400 difference.
  • Putting the brakes on replacements. Repairs are generally preferred over replacements by home warranty companies. That means you might have to fix the same oven problem three or four times before the home warranty company agrees to replace the entire appliance.

Considerations before purchasing a home warranty

What are the costs of a home warranty?

  • Premium: The actual price of your warranty. According to the National Home Services Contract Association, the cost of a basic contract would be between $400 and $550 per year.
  • Service fees: According to NHSCA, these typically range from $35 to $100 per call.
  • Additional Coverage: If you want more than basic coverage for your home's systems, you can choose from upgraded packages that cover appliances and other components. Then, if you want coverage for a specific component, such as a pool or septic system, you can add it as a line item to your warranty.

What’s covered by a home warranty?

Covered systems and appliances, according to the National Home Services Contract Association, typically include:

  • Interior plumbing
  • Heating systems
  • Electrical systems
  • Water heaters
  • Ductwork
  • Dishwashers
  • Ovens, cooktops, and ranges
  • Garbage disposals
  • Garage-door openers
  • Air conditioning (may be optional coverage)
  • Refrigerator (may be optional coverage)
  • Washer dryer (may be optional coverage)
  • Pool equipment (optional)
  • Spa equipment (optional)

Do I have an emergency fund?

Experts recommend allocating 1% to 4% of your home's value for emergency home repairs each year. If you don't have that much money set aside, a home warranty may be a good option for you.

How long do I want to keep the warranty?

Home sellers frequently offer a home warranty contract to sweeten the deal for the buyer. If you've recently purchased your home, it may be beneficial to keep the warranty for a year or two until you have a better idea of the condition of your home's systems.

How old is my home?

Home warranties are more valuable in older homes because they have more aging components that require regular repairs.

What do I know about the warranty company?

Before you sign a contract, thoroughly research your home warranty provider. If you have any complaints, contact the Better Business Bureau and your state attorney general's office. The organization may also have registered with the National Association of Insurance Commissioners.

Did I read the fine print?

Examine your contract carefully for any excluded repairs, systems, or components. Pay close attention to the contract's improper maintenance clause, which may hold you liable for repairs if the company suspects a lack of upkeep.

Remember: There is no law or insurance policy that requires you to purchase a home warranty. These policies are entirely discretionary. It's perfectly fine if a home warranty isn't for you. However, if it fits your lifestyle, go for it.