What a home warranty covers and whether it's worth it
This article is for educational purposes only and is not a substitute for professional advice. Local codes, regulations, and best practices vary by region.
The seller paid for a one-year home warranty as part of the closing. Or you’re being offered one and it sounds appealing for peace of mind. Or your homeowners insurance didn’t cover something and you’re wishing you’d purchased a warranty. Home warranties sound like insurance, but they’re actually service contracts, and whether one makes sense depends entirely on your house’s age, what systems are in it, and what risks you can absorb.
What a Home Warranty Actually Is
A home warranty is a service contract, not insurance. The warranty company agrees to cover repair or replacement of specified systems and appliances that fail due to normal wear and tear. If your furnace breaks down, you call the warranty company, and they either repair it or replace it, typically covering the cost minus a service fee (usually $50-150 per service call).
This is different from homeowners insurance, which covers sudden, accidental damage (a pipe bursts), but not normal wear and tear (an old furnace finally fails).
What’s Usually Covered
Most home warranties cover major appliances and systems: furnace, air conditioning, water heater, plumbing system, electrical system, roof, gutters, and major appliances like refrigerator, dishwasher, range, and washer/dryer. Some warranties are comprehensive; some cover only certain items. Coverage varies by plan and company.
What’s almost never covered is anything pre-existing or anything the warranty company determines was inadequately maintained. If your furnace hasn’t been serviced in years and they determine it failed due to neglect, they might deny coverage.
Cost
Home warranties cost $400-600 annually for a basic plan. Additional service calls cost $50-150 each depending on the warranty company and whether they handle the repair or send a contractor. If you need a new furnace or AC unit, the warranty might cover the cost, but some warranties have limits or additional deductibles for major items.
The warranty company also profits from denying claims, so they scrutinize every claim for pre-existing conditions, lack of maintenance, or reasons to decline.
When a Home Warranty Makes Sense
A home warranty makes most sense if you’ve just bought an older house (15-30 years old) where multiple systems are approaching or at end of life. Within the first year, you might have a furnace failure, an AC failure, or a water heater failure. The warranty covers these, protecting you from paying $5,000-10,000 for each major system failure.
A new house doesn’t need a warranty. The systems are new and have long lifespans. Paying for warranty coverage on new systems is wasteful.
A house where you’ve already replaced major systems doesn’t need a warranty because the systems are new and not likely to fail soon.
When a Home Warranty Doesn’t Make Sense
Warranties are expensive relative to the actual risk if you’re financially stable enough to handle an unexpected $5,000 repair. If a furnace fails, replacing it is a significant expense, but if you have an emergency fund, you can absorb it.
Warranties also have low payout rates. Warranty companies take money for contracts and pay out claims selectively. Many homeowners pay the warranty cost yearly without needing service, effectively subsidizing other claims.
The Fine Print
Before buying or renewing a home warranty, read the exclusions carefully. Pre-existing conditions, inadequate maintenance, failure to follow manufacturer instructions, and items the company determines are out of scope are all common exclusions.
Warranties often have caps on what they’ll pay for major items. They might cover $1,500 toward a $3,000 water heater replacement, leaving you with the difference.
Service calls have time frames. You call to report a problem, they send a technician, but it might be days before someone arrives. This isn’t insurance—you’re not immediately covered; you have to go through a contractor network.
The Reality
Many people buy home warranties and never use them. They pay $500/year for three years and never claim anything. Meanwhile, their house operates fine.
Others have significant claims quickly. A furnace fails in month two of a new warranty and they’re relieved they have coverage.
The warranty company is betting they collect more in premiums than they pay in claims. If enough people pay without claiming, the company profits.
Questions to Ask
Do I have a $5,000 emergency fund? If yes, you can handle most single system failures without a warranty.
What systems in my house are aging? If multiple major systems are 15-20+ years old, a warranty during the year they might fail provides peace of mind.
What has the company’s claim approval rate been? Warranty companies with poor claim approval rates are worthwhile avoiding.
Can I transfer the warranty if I sell? Some can; some can’t. This matters if you’re planning to move in a few years.
The Bottom Line
Home warranties are insurance for risk-averse people with aging houses. If you just bought a 25-year-old house with an original furnace and AC, a one-year warranty might save you thousands. If you’ve already replaced major systems or you have an emergency fund, you might not need one.
The key is understanding what you’re buying. It’s not insurance. It’s a service contract that may or may not cover what breaks. Read the fine print, understand the exclusions, and decide based on your house’s age and your financial situation.
© The Whole Home Guide