What You Need to Know About Home Warranties

For a lot of new homeowners, the term “home warranty” can be slightly confusing. You might be asking yourself, for instance, what’s the difference between a home warranty and homeowners insurance? Don’t worry—SafeWise is here to make home warranties a little more understandable by answering some basic questions.

A home warranty is a service contract that covers the repair or replacement of household appliances and mechanical systems.

If this sounds like homeowners insurance, it isn’t. When you have homeowners insurance, you’re legally required by a mortgage lender to pay a premium that covers your home in cases of extensive, structural damage, and it may not cover certain repairs. In contrast, purchasing a home warranty is optional and applies mostly to wear-and-tear maintenance.

So, are home warranties a new thing? Kind of. The home warranty industry was born in the nineteen seventies and has grown steadily ever since. These days, new homeowners are the ones who most often take advantage of home warranties in addition to their homeowners insurance.

It depends on the company and plan, but most home warranty companies offer coverage for mechanical systems like plumbing, electrical, heating, and air conditioning. Most home warranty companies also feature plans that cover appliances. These include refrigerators, ovens, dishwashers, washers, and dryers.

As you can imagine, the comprehensiveness of your coverage will vary from company to company and plan to plan. That said, as a rule of thumb, home warranties don’t cover mechanical systems or home appliances that have been accidently misused, damaged on purpose, or maintained inadequately. Likewise, certain home warranty companies won’t replace non-mechanical parts, such as handles or knobs.

Also, keep an eye out for what companies call “known conditions” or “pre-existing conditions.” By and large, home warranty contracts dictate that repairs aren’t covered if problems or defects were documented before the start date of your coverage. How companies determine this is rather vague. Some companies cross-reference home inspection documents with records of previous repair calls and then make a judgement call.

If you have an old appliance you want a home warranty to cover, you’ll need to consider if your old appliance has a paper trail of known conditions and see if your contract lists it as a covered item. These are just a couple of the things you’ll need to check to know for sure if you can cover it.

Above all, you should thoroughly read your home warranty contract—both before and after you sign it—to understand your coverage, including its limitations and exclusions. We know that sounds tedious and boring, but certain limitations may indicate exactly how much money your home warranty company will pay to repair or replace covered items.

It’s hard to pin down exact costs because most home warranty companies prefer custom quotes to standard pricing, but home warranty plans usually cost somewhere from $350 to $500 annually. Home warranty companies determine these prices by taking into account a variety of factors, like home size and what they call “loss history.” With loss history, companies typically factor in two main things: how likely a covered item is to break down and the average cost to repair or replace it.

On top of plan costs, homeowners usually pay a service fee that can cost anywhere between $50 and $75 per repair. This payment is made directly to the contractor who is dispatched to make assessments and repairs on your home. The good news is that this is a one-time payment and that your home warranty premium should cover all the rest of the costs associated with your claim.

In addition to basic home warranty plans, homeowners can also purchase more coverage for added protection. Plan add-ons and so-called “enhanced plans” can cost anywhere from $100 to $500 more a year, depending on the nature of the additional items covered. Add-ons usually include items like pools, spas, sump pumps, and ice makers.

The bottom line? Home warranty costs can add up quickly if you’re not vigilant, but may be worth it if you have expensive appliances or mechanical systems in your home.

How home warranty insurance works isn’t all that complicated. When your designated mechanical system or household appliance has problems, this is what should happen next.

1. You call your home warranty company.

2. Your home warranty company sends a contractor.

3. You pay the service fee to the contractor.

4. The contractor diagnoses the problem and gets your service approved by the home warranty company.

5. Your home warranty company pays the contractor.

Homeowners should always call their home warranty company before making any DIY repairs or hiring non-approved contractors because most companies don’t reimburse out-of-pocket expenses. When you call, the home warranty company usually determines whether or not your mechanical system or household appliance is covered and then sends an approved contractor to your home.

After you pay the customary service fee to the contractor, they figure out what’s amiss. Then the contractor gets approval from the home warranty company to make the necessary repairs. In most instances, the home warranty company pays the contractor the remaining balance of their services.

Sounds pretty reasonable. What’s the catch? Approvals can slow the process, and payments pass through lots of hands.

Sometimes repairs or replacements don’t go as quickly as they would if you paid out of pocket, perhaps because the approved contractors that home warranty companies typically send aren’t their employees. Payments must pass through several hands and repairs must be approved in advance, adding time to the process.

Home warranties can come in handy when integral mechanical systems or expensive appliances break down unexpectedly. And they can be especially helpful for new homeowners or prospective buyers with little or no accrued savings. In short, a good home warranty can help spread costs out a little bit.

By doing an informal cost-benefit analysis, you’ll be able to tell pretty quickly if paying an annual premium makes sense for you and your home. Start by weighing potential repair costs versus average premium costs. You also may want to consider the age of your mechanical system or household appliance. And remember, as with any contract, the devil is in the details.

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