Is a Home Warranty Worth the Annual Cost?

Homeownership comes with its fair share of responsibilities and expenses. From mortgage payments to property taxes and homeowners insurance, there's no shortage of financial commitments.

But are there ways to lower the chances of an expensive surprise busting your budget? There may be, in the form of a home warranty. Of course, the questions are "Is a home warranty worth the annual cost?" and its companion, "What does a home warranty cover?"

Home warranty companies offer a kind of blanket service contract that covers the repair or replacement of major home systems and appliances. These can include HVAC systems, electrical systems and components, water heaters, washers and dryers, dishwashers and more. A home warranty policy may provide added peace of mind for homeowners in cases where the homeowners insurance policy doesn't cover items like a roof leak or septic system issue.

As with any financial decision, there are pros and cons to consider before jumping into a contract. It’s important to read the fine print of a home warranty policy to determine exactly what kinds of repairs or replacements are covered and whether there are any out-of-pocket expenses or deductibles for service calls or other repair fees for which you may be responsible. You'll also need to consider any add-on costs for additional coverage you may need or want, and understand coverage limits that apply for each covered item or system.

Pros of a Home Warranty

1. Financial Protection

One of the primary advantages of a home warranty plan is financial protection for things not covered by your home insurance. When a covered system or appliance breaks down and needs unexpected repairs, a home warranty can save you from having to pay the full cost of repairs or replacement out of pocket. As repair and replacement costs can quickly add up, this can be particularly beneficial if you have an older home or aging appliances. Home warranty coverage can also help new or first-time homebuyers feel confident that are protected if problems should arise after their purchase.

2. Service Call Convenience

Home warranty companies usually contract with a network of pre-screened service providers. When an issue arises or a covered appliance has a sudden break down, you only have to contact the home warranty company; they will arrange for a qualified technician to make a service call to assess and address the problem. This saves you the time and hassle of finding and hiring repair professionals on your own.

3. Budget Predictability

Unlike the unknowable cost of budgeting for appliance repairs and replacement out of pocket, home warranties typically involve a fixed annual premium or monthly fee, making it easier to budget for these unexpected repair costs. In many cases, the first year's cost may not even come out of your pocket; it's not uncommon for a home seller to purchase a one-year home warranty for a prospective buyer, paying the first-year's annual premium as part of the sale. Of course, you can always purchase one on your own behalf, too.

After one year, you may be able to renew or continue coverage by paying an on-going monthly premium. As long as it is in force, a home warranty policy can offer extended protection for major appliances even after the manufacturer’s warranty expires.

4. Enhanced Buyer Appeal

Having a home warranty in place can be an attractive selling point when you decide to put your house on the market. Potential buyers may see it as an added benefit, boosting your home's marketability. First-time homebuyers may feel more secure in their decision knowing major appliances and fixtures like air conditioning units, HVAC systems, water heaters, kitchen appliances and even garage door openers are covered.

This may be especially important to buyers of older homes, where plumbing systems, electrical systems or major home appliances may receive less-than-favorable comments on the buyer's home inspection report.

Cons of a Home Warranty

1. Cost Over Time

While home warranties provide financial protection, they are not free. Home warranty coverage typically only lasts for one year, and can be renewed, but the cost of the warranty itself along with any service fees for each repair visit can add up over time. Some homeowners may find that they pay more in premiums and fees than they might save on repairs.

An argument can be made that it may be as (or more) cost-effective to put the cost of any home warranty and projected service call fees into an emergency fund. You then tap into this account to repair or replace failing appliances or systems that may have seen a lack of or improper maintenance over their service lives or have just come to the end of them. However, some homeowners may find it easier to budget for a home warranty contract than to build up savings.

2. Limited Coverage

Home warranties have limitations. They typically cover specific systems and appliances, and not everything in your home may be eligible for protection. Understanding the terms and exclusions in your warranty contract is crucial to avoid disappointment should a claim be denied.

Read the fine print of your home warranty contract and research the offerings and coverage plans offered by several home warranty companies. You can typically find feedback for these home warranty providers on the Better Business Bureau website. Most large, reputable home warranty companies such as American Home Shield will have a BBB score and accreditation where you can view company feedback and look through reviews.

3. Service Quality

The quality of service can vary among warranty providers and service technicians. Some homeowners have reported frustration with delays in having repairs performed or with the quality of workmanship provided by preferred service providers. Home warranty companies may look to extend the lifespan of your major systems or appliances by having service providers repair rather than replace them. For covered items that have been subject to improper maintenance over time, this may lead to additional service calls to be made and fees to be paid should the item be near the end of its expected service life.

4. Deductibles and Caps

Many home warranty contracts come with deductibles and caps on coverage. This means you may still have to pay a portion of the repair cost, even if the issue is covered. Additionally, warranties may have limits on the total amount they will pay out, leaving you responsible for any costs beyond those limits.

Is a home warranty plan right for me?

There's no one simple yes or no answer. Whether a home warranty is worth the cost depends on your individual circumstances and preferences as well as the age of the home, systems, and appliances you own.

The best home warranty companies can certainly provide peace of mind should your home appliances or major systems need repair. If you value financial protection, convenience, and budget predictability, a home warranty may be a wise investment. This is especially true if the home you are buying or already is an older home or contains systems and fixtures that haven't been updated in a while.

However, if you are buying new construction or a recently renovated existing home that has new appliances or HVAC systems, or if you're confident in your ability to handle home repairs and maintenance on your own, you may find that the costs of a home warranty outweigh the benefits.

Ultimately, it's essential to carefully weigh the pros and cons and thoroughly research warranty providers to make an informed decision about whether a home protection plan is the right choice for you and your personal finances.