What Is a Home Warranty and How Do They Work?

Leaking washing machine with suds escaping

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A home warranty is a type of service contract that covers repairs and replacements on major home systems and appliances. Home warranty contracts usually remain in effect for one year and are renewable every 12 months.

What is a Home Warranty Plan?

A home warranty plan is a contract between a homeowner and a home warranty company. It explains what the homeowner is paying for and what type of coverage the company provides if a major home system or appliance breaks down.

What is the Difference Between a Home Warranty Plan and a Home Insurance Plan?

A home warranty plan provides protection in the event that a major home system or an appliance breaks down. These types of malfunctions are generally caused by wear and tear through usage, or when a system has reached the end of its usability. As an example, the compressor on an air conditioning unit breaking down, or the refrigerator stops keeping food cold.

Your homeowner’s insurance coverage pays for damages and loss because of a catastrophic event, such as fire, water, or weather damage. It won’t pay for the heating element in a water heater going out, but it will pay for new flooring and carpet if the water heater leaks and causes extensive damage to the floor.

What Does a Home Warranty Cover?

What a home warranty plan covers depends on the type of plan you purchase, and what type of coverage the company offers as part of its protection package.

Most companies offer a selection of three plans to choose from and the coverage depends on the amount you want to pay and the type of items you are looking to include. These plans usually include a Major Home System plan, an Appliance plan, and a Combo plan, which provides coverage on both.

In some cases, homeowners may also have the option to purchase coverage for additional items, such as pools and in-ground spas, well pumps, and electronics.

You'll need to read the small print carefully to understand if the level of coverage is right for you and your home.

Examples of Coverage for a Major Home Systems Plan

Attic fans Humidifiers
Built-in whirlpools and Jetted tubs Interior electrical
Burglar and fire alarms Plumbing (excludes fixtures)
Ceiling fans Re-key services
Central air conditioning Smoke detectors
Central home heating Sump pumps
Central vacuums Telephone lines
Doorbells Toilets
Ductwork Water heaters

Example of Coverage for Appliances

Refrigerators Built-in Microwave Ovens
Ranges/Ovens/Cooktops Trash Compactors
Clothes Washers Free-standing Ice Makers
Clothes Dryers Garage Door Openers
Dishwashers Built-in Food Centers

Examples of Add-Ons

Plasma TVs Laptops/desktops
Tablets Home theater systems
Gaming Smart home products
Pool and In-ground Spa Well pump (serving as home water source)
Roof repairs Septic tanks

How Do Home Warranty Claims Work?

When an appliance or system breaks down, the homeowner makes a claim to the home warranty company. If the problem is covered by the warranty plan, the company will contact a licensed service provider in the area. Once the service provider arrives, they will determine what the problem is and, depending on the type of coverage, make the repairs or replace the item if it is not repairable.

If the repair is not covered under the plan, the homeowner can either have the service provider make the repair and pay for it out-of-pocket, or they can choose to hire someone else instead.

What is a Trade Service Fee?

Regardless of what the homeowner decides at the call out, they will still have to pay the service provider a Trade Service Fee whether the repairs are made or not. This fee is generally between $75 to $125 and payment is due at the time of the appointment.

You may also see this referred to as a Trade Call Fee by some home warranty companies. This predetermined fee is paid each time a service provider visits (unless stated otherwise in the contract).

What is a Cap Limit?

A cap limit (sometimes referred to as a payout cap) is the total dollar amount that is paid out by the company for repairs. This varies from company to company.

For example, one company may set a cap at $3,000 per year for all appliances covered under their plan. Another company may set a cap limit of, say, $500 for each appliance instead.

When doing your research, it is a good idea to carefully compare the cap limits set for each home warranty plan you are interested in as they can vary widely.

What is a Plan Exclusion?

A plan exclusion is a list of items not covered under the service contract. These lists are often quite extensive and if not read over carefully, you may assume something is covered by your plan that is not.

As an example, Major Home System plans typically cover the plumbing system in a house, but the fixtures, such as a toilet or sink, are not usually part of the plan, nor are repairs covered if there is a leak outside the home. 

How Much Does a Home Warranty Cost?

The cost of a home warranty plan varies greatly depending on what type you purchase and what items you want to cover. As you might expect, the more coverage you get, the higher the cost.

The average price for a home warranty plan ranges from around $350 to $600 per year. If you want to cover additional items, such as well pumps and roof repair, expect to add anywhere from $100 to $500 to the yearly amount.

Is a Home Warranty Plan Right for You?

A home warranty provides you with the comfort of knowing that your major home systems and appliances are protected if they break down. Although there are upfront costs and trade service fees to pay, it can save you worrying about having an unexpected and potentially costly expense further down the line.

Not all home warranty plans are created equal, however. We recommend doing your due diligence before you purchase a plan to ensure you understand exactly what type of coverage you have and what out-of-pocket expenses you may find yourself responsible for if you need to make a claim.