What is a Home Warranty?
A home warranty is a service contract that covers the repair or replacement of major home systems and appliances that break down due to normal wear and tear. Unlike homeowner's insurance (which covers damage from events like fire, storms, and theft), a home warranty covers mechanical failures of things like HVAC systems, plumbing, electrical, water heaters, kitchen appliances, washers, and dryers.
How home warranties work
You pay an annual premium ($300-$600 for basic coverage, $500-$800 for comprehensive). When a covered system or appliance breaks, you call the warranty company, pay a service fee ($75-$150 per visit), and a technician is dispatched to diagnose and repair or replace the item. The warranty covers the repair or replacement cost beyond the service fee.
For sellers and transactions
Sellers sometimes provide a home warranty to the buyer as a selling concession, giving the buyer confidence that major systems are covered during the first year of ownership. In wholesale and investor transactions, home warranties are less common because as-is deals are expected to have issues and the buyer is typically experienced enough to handle repairs directly.
For rental investors
Some landlords use home warranties on their rental properties to cap maintenance costs. If the HVAC fails, the warranty covers replacement minus the service fee ($75-$150) instead of the full cost ($5,000-$10,000). The math works when you have older properties with aging systems. The math does not work for newer properties where major systems are unlikely to fail.
Limitations
Home warranties have significant exclusions: pre-existing conditions, improper installation, lack of maintenance, and code upgrades are commonly excluded. Not all brands and systems are covered. There are caps on replacement amounts. And the warranty company chooses the technician and replacement parts, which may not meet your standards. Read the contract carefully before purchasing.