Are Home Warranties Worth It, Really?

It’s no secret that home repairs are an unavoidable part of homeownership. And while some fixes may be cheap and easy, others can be more costly and quite complicated. That’s why home warranties can be such a valuable tool for homeowners. They can help alleviate your financial burden when things break or break down.

Like anything you’re thinking about purchasing, there are pros, cons and a whole bunch of factors to consider before purchasing a home warranty. We’ll explain what home warranties are and how they work. And we’ll review the fine print to help you decide whether buying a home warranty is worthwhile.

Home Warranties: What They Are and How They Work 

A home warranty is an optional service contract that is supposed to protect you from expensive, unforeseen repairs. Warranties are usually purchased around the same time you purchase your home, but you can purchase one at any time. If an item covered by your home warranty breaks, you call the home warranty company, and they send a contractor to repair or replace the item.

Home Warranties: What’s Covered and What’s Not

Like home insurance policies, home warranties have exclusions and limits. What is and isn’t covered is based on the coverage you choose. Home warranties are not home insurance policies, but they work a bit like insurance. Some homeowners never use their home warranty and may feel like they wasted their money. Others use them several times and feel like they saved a lot of money.

What’s covered under home warranties

You can expect most home warranties to cover:

• HVAC
• Water heaters
• Plumbing
• Electrical systems
• Appliances

What’s not covered under home warranties

There are always exceptions, but typically, home warranties do not cover:

• Structural issues in foundations and walls
• Paint
• Flooring
• Normal wear and tear
• Pest infestation

Home Warranty vs. Homeowners Insurance

Again, home warranties are not insurance policies – but there are plenty of similarities. Home warranties usually cover appliances and systems in your home even if the reason they stopped working isn’t clear. 

Home warranties are optional, and homeowners typically buy them around the time they purchase their property. But you can purchase coverage any time after you close on your home as long as your appliances are in good working order. Most home warranty companies won’t cover preexisting issues with your systems.

A homeowners insurance policy is typically required if you have a mortgage on your property (and it’s good to have even if you buy your home with cash). Homeowners insurance protects your home if there is a “covered cause” of loss, like a fire, theft or damage from storms or accidents. You can shop for new homeowners insurance anytime and change your coverage mid-policy.

Home warranties cover normal wear and tear of home systems and appliances, while homeowners insurance covers damage from unforeseen events.

If your water heater breaks because it’s old and malfunctioning, a home warranty would probably replace it. But if your water heater doesn’t work because of fire damage, you’d use your homeowners insurance to cover the cost of replacing it.

Home Warranties: Pros and Cons

Now that you know what home warranties are, how they work and what they cover, it’s time to decide whether a home warranty is right for you.

When Home Warranties Make Sense

If you’re on the fence about purchasing a home warranty, here are some situations when a home warranty can be a good idea:

• You’re buying an older home: Because older homes typically have more wear and tear, warranties can be especially useful. When you purchase a home warranty, you are ensuring coverage in case something goes wrong.
• You’re a first-time home buyer: First-time buyers may not know what flaws or defects to look out for when they’re buying a home. A home warranty may help soothe their nerves during the home buying process.
• You don’t have a ton of connections: If you’re new to the area or don’t know any local contractors, your home warranty provider will hire a contractor for repairs.
• You aren’t handy: If you and the person you purchased the home with prefer watching home repair shows over making home repairs, a home warranty can be a lifesaver.
• Your down payment depleted your emergency fund: If you used your savings to make a down payment, a home warranty can give you some much-needed financial stability during the first year of homeownership because the cost of repairs or replacements is more predictable. When you have a clearer picture of your expenses, you also know how much money you can funnel to your depleted emergency fund.
• Seller may offer to pay for a home warranty: Sellers may offer to purchase a home warranty as an added incentive for buyers. It’s a common strategy in both seller’s and buyer’s markets because policies are an affordable way to offer something invaluable when a big purchase is at stake: confidence.

When Home Warranties Don’t Make Sense

And then there are times when a home warranty doesn’t make sense:

• You know things weren’t properly maintained: If you know the home wasn’t properly maintained before it was sold, chances are any preexisting problems won’t be covered.
• You prefer to have oversight: If you prefer to choose your contractor or replacements for your appliances, you may find a home warranty too constricting.
• You think what will need replacing isn’t worth the warranty cost: If you think the home warranty will cost more than any items you suspect may need replacing, the warranty may not be a worthwhile expense for you.
• Your appliances might already be covered: Before you buy a warranty, check to see if your appliances (washer, dryer, air conditioner etc.) have extended manufacturer’s warranties. If you’re in a new home with new appliances or your appliances were recently replaced, that may be the case.

Home Warranty Cost

A home warranty policy typically ranges from $40 to $80 a month, with service fees that cost $50 – $150.^[1]

Let’s say you have a home warranty that costs you $60 a month. In a year, you’d pay $720 for the policy. If you made one service call (which costs $100), your total out-of-pocket cost would be $820.

So you can compare, here are some typical costs to replace a few items commonly covered under a home warranty:

• Water heater: $835 – $1,660^[2]
• Furnace: $2,803 – $6,769^[3]
• Garbage disposal: $150 – $950^[4]
• Dishwasher: $370 – $1,500^[5]

As you can see, using your home warranty even once can save you a significant amount of money, depending on the cost of the repair.

Things To Consider Before Getting a Home Warranty

Consider these key factors to help you decide whether a home warranty makes sense: 

• Read the fine print: We can’t stress enough how important it is to understand what’s covered (and not covered) in a policy. Does the company offer a plan that covers many of the items you need protected? If not, you may need add-on coverage for items that aren’t listed in their standard plans.
• Find a home warranty you can trust: There are a lot of home warranties out there. Find a reputable company by reading online reviews, checking out their BBB® rating and getting recommendations from your real estate agent.

Peace of Mind

While it may not be clear whether a home warranty is a waste of money or not, for many homeowners, the peace of mind is worth the cost. If a home warranty takes some of the stress out of homeownership, it may be well worth the investment.