What is a home warranty?

A home warranty service contract is a low-cost plan that generally covers repairs for electrical, plumbing and heating systems and built-in appliances that are not covered by regular homeowner's insurance [1].

What's covered?

A home warranty service contract can cover repairs if you have an unexpected breakdown in electrical, plumbing or heating systems, or trouble with built-in appliances, such as ranges, washers, disposals, whirlpool baths, as well as other mechanical systems and built-in fixtures in your home.

A home warranty service contract is optional, but it benefits both buyers and sellers from surprise repair costs that are not covered by homeowner's insurance.

If you are selling, a home warranty plan can add to your selling points. Potential buyers will know that coverage is there if a system breaks down after the purchase. You are also protected if, during the closing, a problem covered by your plan occurs. Plus, if a repair is needed, after you sell your property, the new owner will call the insurance company directly (and not you).

If you are buying, you have the added security of knowing that systems and fixtures will be covered when the sale is complete.

Home warranty coverage can vary by state and by contract.

How much does it cost?

The price of a typical home warranty plan for a single family home ranges from $175 to $400 - depending on the size and age of the property and the amount of coverage you choose. It is far less than the replacement cost of the systems and appliances it covers. There is usually a deductible of between $35 and $50.

Most basic plans, for example, will usually cover your water heater, refrigerator, washer, dryer, garbage disposal and micro-wave oven (if it is built in).

Higher-end policies can cover air conditioning, ductwork, garage door openers, pools, spas, sprinkler systems, well pumps and plumbing fixtures.

Who pays?

Generally, the buyer pays the cost of a home warranty policy; however, the seller may buy a policy for the benefit of the buyer to avoid certain liabilities that may arise if problems occur after the closing.

Coverage begins as soon as you apply for it; premiums are paid at the time you close the transaction.

Smart Tips

• Some title insurance companies offer special rates if you are also buying title insurance [2] and other closing services at the same time.
• Read the policy carefully and review all the services that are included. Always ask about any limits in coverage. The least expensive policy may not cover all your needs.
• Ask about deductibles, fees for repair visits, and second-year renewal rates, so that you can make an informed decision.
• Keep good records! It's very good practice to keep all important paperwork related to your appliances and household systems in a file or folder that provides easy access. That includes purchase dates and prices, receipts for repairs and all maintenance records.
• Ask if the home warranty company you are considering provides like-kind or better replacements if an appliance that is covered in a policy breaks down.
• If you are the buyer, make sure that the premium has been paid before you close the transaction, so that you are covered the moment you take ownership of the property.