Are Home Warranties Worth It?
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A home warranty, also known as a home protection plan, is an annual service contract that covers major appliances and systems when they break down due to normal wear and tear. You pay a monthly premium and the provider will cover repair or replacement costs for certain items that malfunction.
Naturally, homeowners want to know whether this monthly premium for a home warranty contract is worth the cost. Under the right circumstances, protection from one of the best home warranty companies could save you from paying expensive, out-of-pocket costs for repairs and replacements.
“A warranty can be valuable if the house is old and systems or appliances are at the end of their useful life. A home warranty in this case can reduce the out-of-pocket repair costs for the owners,” says Neil Eldin, Ph.D., professor of construction management at the University of Houston.
We’ll explain those circumstances as well as how home warranties work to show you whether one of these plans is worth it.
Did You Know?
- In the last 30 days, more than 2,500 people bought home warranties from the above providers. Liberty Home Guard is our most popular provider, with 55% of buyers choosing to cover their homes with an LHG plan.
What Does a Home Warranty Cover?
To decide whether a home warranty is worth it, you first need to understand what a home warranty is and what it covers. Most plans either cover important home systems, home appliances, or a combination of both. The following appliances and systems are usually included:
- Air conditioning
- Heating
- Plumbing
- Electrical
- Kitchen appliances like the refrigerator, dishwasher, oven, and built-in microwave
- Clothes washer and dryer
- Garage door opener
- Water heater
In addition, most companies allow you to add coverage for items such as a central vacuum or pool pump for an extra monthly fee. If a covered item breaks from wear-and-tear damage during the duration of your home warranty, the company will send a technician to repair it. If a repair isn’t possible, the provider will typically either replace it or send you a check.
What Doesn’t a Home Warranty Cover?
Just as important as understanding what a home warranty covers is knowing what it excludes. Daniel Cabrera, founder of Sell My House Fast, said you should ask, “What are the limits and exclusions when buying a home warranty?” He added, “Homeowners should understand what specific items, parts, or situations the company excludes from the warranty.”
On covered items, typically only mechanical parts are protected. That means accessories like shelves, grilles, dials, and casings are typically not covered. A home warranty also won’t pay to repair purely cosmetic damage.
Most importantly, not all types of damage are covered. Sydney Sims, consumer advocate at Ownerly, says, “Home warranties often exclude repairs caused by insufficient maintenance or natural disasters. They typically do not cover preexisting issues or problems that occur due to neglect. Also, there might be coverage caps for certain items, meaning only a portion of repair costs will be covered beyond a set limit.”
A protected system or appliance will typically only qualify for repair if it breaks because of wear-and-tear damage. It also must be well-maintained and in good working order before the contract begins. Damage from the following conditions and situations won’t be covered unless your contract specifies that it is:
- Accidental or purposeful damage
- Damage from insufficient maintenance
- Damage from improper installation, repair, or modification
- Rust, corrosion, and sediment
- Known or unknown preexisting conditions
- Damage from natural disasters, crime, or acts of God
Before signing up for a home warranty, it might be worth getting a home inspection to verify that systems are properly installed and maintained. The home inspection report may also indicate which appliances are nearing the end of their expected lives, so you can get a better idea of which items need protection the most.
How Does a Home Warranty Work?
Once you’ve purchased a home warranty and signed the contract, there’s a 30-day waiting period before coverage begins. Once the waiting period is over, when a covered item quits working, you can call the home warranty company to file a claim or submit a claim online. Although most companies allow you to submit claims 24/7, you’ll wait until the next business day for the claim to be processed.
Once the claim is processed, the home warranty company will arrange for a preapproved service provider to come to your home to assess the problem, usually within 48 hours. The technician will diagnose the problem, and if it falls under the terms of your warranty, they’ll begin the repair process.
If possible, the technician will perform the repair immediately. If a replacement is necessary, they’ll schedule a follow-up appointment to complete the replacement. You’ll pay a service call fee directly to the technician every time they visit your home.
Home Warranties vs. Homeowners Insurance
Don’t confuse a home warranty with home insurance. “Both are extremely important to have with any purchase,” says Jennifer Okhovat, real estate agent at Compass in Beverly Hills. “If you are getting a loan on the home, your lender will require you to carry homeowner’s insurance. Having a home warranty can help you with especially smaller items that may unexpectedly stop working.”
Though both policies protect your home, they cover different items and circumstances. A home warranty covers systems and appliances in your home when they stop working due to normal wear and tear. However, homeowners insurance protects you financially when your home suffers damage from a catastrophic event, such as a natural disaster or fire.
For example, if lightning strikes your house and a resulting power surge fries your refrigerator, you’ll contact your home insurer for coverage. However, if your fridge needs a repair because it wears out after years of normal use, you’ll file a claim with your home warranty company.
It may still be a good idea to invest in a home warranty because of the cost savings you could receive on unexpected repairs and replacements.
What Are the Costs and Benefits of a Home Warranty?
Home warranties can provide peace of mind since you won’t need to worry about paying out of pocket for wear-and-tear damage to covered items. “As a business, third-party home warranty programs must take in more money than they pay out,” says Kevin Grosskopf, professor at the University of Nebraska-Lincoln. “Peace of mind, however, may be worth the price particularly when buying an existing home, particularly an older home.”
Home warranties can have tangible financial benefits, too. To determine these upsides, you’ll need to determine how much a home warranty costs and estimate how often you expect to use it.
How Much Does a Home Warranty Cost?
When it comes to home warranty prices, consider the monthly or annual premium, the service call fee, and other potential costs.
- Premium—The premium is the monthly or annual fee you pay the home warranty company. Your premium will vary depending on factors such as the level of coverage you sign up for and where you live. The cost of a home warranty averages between $540 and $865 a year or between $45 and $72 per month.
- Service fee—The service fee is what you pay the service technician who comes to your house to make a repair or replacement after you file a claim. It’s similar to a deductible in an auto insurance policy. Some home warranty companies like American Home Shield and America’s First Choice Home Warranty allow you to choose a higher service fee in exchange for a lower premium. The average service fee costs between $75 and $125.
- Other costs—Most home warranty companies will charge an industry standard cancellation fee of $75 if customers terminate their plan after the first 30 days of coverage.
Sims provided a detailed overview of the factors that might affect the cost: “The cost of a home warranty is influenced by several things, such as the level of coverage chosen, geographic location, service fees, and frequency of claims. Plans with more comprehensive coverage, particularly for additional systems or premium appliances, tend to be more expensive. Some providers may also consider the age of the home and items being covered,” she says.
The actual net cost for a home warranty will depend on how often you use it for covered repairs. If a covered appliance or system breaks from wear-and-tear damage during your coverage period, the benefits can outweigh the premium and service fee costs. You may end up recouping every penny you paid for the home warranty with just one service call a year.
For example, the average cost to replace a water heater is $1,302. Let’s say you pay a $600 annual premium and two $100 service fees for the diagnosis visit and the replacement visit. In this case, the home warranty company has saved you $502 over the out-of-pocket cost of a water heater replacement.
Note that most home warranty plans include coverage caps on different home systems and appliances. The industry standard is $2,000 per system or appliance each year. If the repair or replacement costs more than the limit, you’ll pay the difference out of pocket. However, with an annual premium of $600, you still stand to save up to $1,400, minus service call fees, on repairs or replacements that exceed the coverage cap.
Benefits of a Home Warranty
The benefits of a home warranty aren’t limited to cost savings. You’ll also save time and hassle on hiring repair technicians yourself. Here’s what you stand to gain:
- The peace of mind that comes from knowing you won’t have to pay the full cost of a repair or replacement when a covered system wears out
- Access to a network of experienced, preapproved service providers, saving you the hassle of locating a trusted local contractor
- The convenience and simplicity of just one phone number or website to turn to when you need service on a worn-out appliance or home system
For the most accurate cost data, we recommend getting quotes directly from the top companies in the industry.
Expert Insights and Tips
Eldin’s academic career includes roles as professor, department chair, and college dean at prestigious institutions such as the University of Wisconsin-Madison, Oregon State University, Texas A&M University, Purdue School of Engineering and Technology, and the University of Houston.
She works with a wide range of clients throughout Los Angeles. Areas of service include West Hollywood, Hollywood, Hollywood Hills, Los Feliz, Beverly Hills, Hancock Park, Culver City, Miracle Mile, Beverly Grove, and Silicon Beach. She has been a party to more than 100 leases during her career and has broken sales records for a number of properties, including the highest price for a single-family residence sold in West Hollywood West in all of 2019.
Is a Home Warranty Worth It?
Now that we’ve laid out the considerations, costs, and benefits, you can decide for yourself whether a home warranty is worth it. If a covered home appliance or system wears out in the course of normal use, a home warranty could well pay for itself with the cost of a single repair. Since you can’t predict when your home systems or appliances will fail, a home warranty could come in handy, especially for an older home.
However, if you’re purchasing a new construction home, a home warranty might not be necessary. That’s because your home will come with brand-new appliances and systems that are covered by a manufacturer’s warranty. A manufacturer’s warranty protects items if they fail due to defective materials or faulty workmanship, but not because of wear and tear. That’s when a home warranty comes into play.
Overall, certain circumstances make home warranties more valuable to homeowners. We recommend buying a home warranty if:
- You want to limit the amount you pay out of pocket for repairs or replacements of worn-out home systems and appliances.
- You own an older home.
- You’re a first-time homebuyer and want protection for your systems and appliances.
- You’re planning on selling your home and want to entice potential buyers.
- You’re new to an area and don’t know any local repair technicians.
To learn about our top-recommended home warranty companies, read our in-depth company reviews:
- Liberty Home Guard Review
- American Home Shield Review
- Select Home Warranty Review
- First American Home Warranty Review
Our Rating Methodology
We back up our home warranty ratings and recommendations with a detailed rating methodology to objectively score each provider. We conduct research by speaking with company representatives, requesting quotes, analyzing sample contracts from each company, and conducting focus groups and consumer surveys. We then score each provider against our review standards for coverage, cost, trustworthiness, plan transparency, customer support, and flexibility to arrive at a final score on a 5-point rating scale. To share feedback or ask a question about this article, send a note to our Reviews Team at reviews@thisoldhousereviews.com
