What Is A Home Warranty and How Does It Work?

Family sitting on steps in front of house protected by a home warranty plan
Homeowners insurance doesn’t cover everything — have you filled in the gaps? | Adobe Stock, © Ursula Page

Once you’ve decided to buy a home, you should do everything you can to protect it from devastating events covered under a home insurance policy and normal wear and tear on appliances and home systems that can lead to costly repairs. 

Although a homeowner’s insurance policy protects you in the case of damage to your home due to natural disasters, theft or fire, it doesn’t protect components of your home that keep it functional and safe. For instance, it doesn’t cover items such as your dishwasher, refrigerator, electrical system and water heater.

However, many first-time homebuyers aren’t aware that they have the option of a home warranty plan’s added coverage.

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Today’s Homeowner works with an independent reviews team to create evidence-based research that helps our readers make informed decisions. The reviews are always independent. For transparency, we may be compensated if you purchase through a link.

What Is a Home Warranty?

A home warranty plan is typically a one-year contract between you and a home warranty provider. It will cover the repair or replacement of your home’s major appliances and systems due to normal wear and tear.

Once you’ve contracted with your home warranty company, you will typically be subject to a 30-day waiting period before being able to file a claim.

A home warranty plan can be automatically renewed every year. This allows you to have coverage for systems and appliances that have seen years of wear and tear.

Depending on the home warranty provider, you may be required to get a home inspection before finalizing a contract.

How Does a Home Warranty Work?

Although different home warranty plans offer different types of coverage, there are industry standards for overall coverage. Most home warranty companies operate in basically the same manner. 

Here is a breakdown of what you can expect from your home warranty plan.

  1. You call your home warranty company when an appliance or system breaks or malfunctions.
  2. Your home warranty company will call a licensed repair service provider from their network of providers.
  3. The repair service provider contacts you to schedule an appointment. (They usually do this within 24 hours of your service request).
  4. Your appliance or system is repaired or replaced for a service fee generally ranging from $75 to $100. This fee can often be negotiated when you purchase your home warranty plan. Moreover, some companies allow their customers to choose whether they want to pay more monthly in exchange for a lower service fee.

What Does a Home Warranty Plan Cover?

Coverage varies from state to state and company to company, but a standard home warranty provides comprehensive coverage for the components of your home that you use the most. These include the following items:

  • Heating system
  • Cooling system
  • Electrical 
  • Plumbing
  • Water heater
  • Doorbells
  • Ductwork
  • Dishwasher
  • Refrigerator
  • Oven/stove/range/cooktop
  • Washer/dryer
  • Garbage disposal
  • Other appliances or systems covered by each company exclusively

You should always confirm what’s actually covered under your home warranty plan before finalizing the contract. You may be responsible for repairs of uncovered items added to your home such as the cost of solar panels. The best home warranty companies provide a sample contract online for each plan. It’s important that you read the fine print regarding any limitations to coverage and coverage caps.

What Are Coverage Caps?

Coverage caps or coverage limits refer to the maximum amount a home warranty provider covers for an appliance or home system per term. The cap also may apply as a whole to appliances or systems per term.

For instance, a home warranty company may offer to cover up to $1,500 per term for all home systems the plan covers. 
However, specifications — aka fine print — in the same company’s contract may state that they only cover up to $500 for your plumbing system.

Consider coverage caps carefully when choosing the best home warranty company for your needs. 

When Do I Need a Home Warranty the Most?

If your refrigerator breaks on a Saturday morning, you’ll need to know the following details of your home warranty contract:

  • Your service fee
  • Coverage cap for appliances per term or per item
  • Whether the item can be repaired or replaced

For this scenario, if you need to replace a $2,000 refrigerator and your company’s coverage cap is $1,500, you’ll still be out $500.

Or you could be optimistic and consider that you only have to come up with $500 instead of $2,000. 

If you knew this specification when you finalized the contract, at least you made an informed choice. Our research team cannot stress enough how important it is to request quotes from multiple home warranty companies. You also need to read the fine print in their contracts. This can make a big difference when you need coverage the most.

What Does a Home Warranty Cost?

The first things you’ll want to look for in a home warranty company are simplicity and transparency when obtaining the costs involved with their plans. You should be able to read the company’s sample contract and quickly receive a quote on their website or over the phone without making a commitment.

That being said, these costs can vary significantly from company to company:

  • Yearly premiums
  • Service fees
  • Add-on options
  • Discounts
  • Specific perks, such as receiving your first month free 
  • Your location
  • Your specific needs

For most home warranty companies, policies generally cost anywhere between $300 and $800 per year. Coverage varies based on location, provider and plan add-ons.

Home Warranty Service Fees

In addition to your monthly payment toward your premium, almost all home warranty companies charge a set service fee for each visit to repair or replace an appliance or system. The industry average for service fees is around $75; however, some home warranty companies offer service fees as low as $60 and as high as $125. 

When you submit a service request, you’ll only owe the service fee and any additional costs, beyond what is covered, under the cap specified in the contract for the item.

Cost Benefits of a Home Warranty

Bottom line? You’ll want to know that the home warranty you choose is cost-effective. Therefore, you need to know what you’re pulling out versus what you’re putting in.

Here are a few examples of the average cost for common home appliance and system replacements:

  • Water Heater: $300-$900 plus $250 installation, on average
  • AC Unit Replacement: $5,210
  • Furnace Replacement: $3,865

These estimates reflect the risks of not having a home warranty. They help you see the value of having a plan to protect your budget from expensive, unexpected home repairs and replacements.

Added Benefits of Having a Home Warranty

Your home warranty company can provide much more than monetary benefits. The number one perk is this kind of home protection makes you sleep better at night. You can have peace of mind knowing that you’re prepared for costly home repairs.

One of our biggest tools as a research team are legitimate reviews that provide customer feedback about their experience dealing with a specific home warranty company. This is one of the best ways to get to the essence of a company’s service and claims processing.

What You Want in a Home Warranty Company

We use these targets when we review a home warranty provider:

  • Stellar transparency
  • Streamlined quote process
  • Timely repair service
  • 24/7 customer support and service requests
  • Affordability
  • Comprehensiveness of coverage
  • Specific plan offerings
  • Add-on options and cost
  • Specific needs of some homeowners

You can learn a lot about a company by visiting their website. While there, be sure to scan for transparency and test their online tools, such as a chat feature and the quick-quote process.

For other aspects like timely repair service, you can glean information by reading customer reviews.

Although our reviews for home warranty companies are comprehensive, we always recommend that you do your research when making a choice.

If you are worried about your garbage disposal breaking in the future, consider a home warranty that would cover a large portion of the costs for the repair. Our review team put together a comprehensive guide to the best home warranty providers, including American Home Shield, Select Home Warranty, America’s 1st Choice Home Club, and more.