What is a home warranty?

Homeowners insurance covers your home in the event of major risks such as fire, theft, or hail. This is usually mandatory when you have a mortgage. But if you want extra financial protection for normal wear and tear, you’ll need additional coverage — and that’s where a home warranty comes in handy.

A home warranty is a coverage plan for the major systems and appliances in your home, such as the water heater, HVAC, and plumbing. The plan can help you get service, repairs, or even replacement, saving you money and stress when something (inevitably) breaks.

However, not all home warranties cover the same things. The last thing you need when standing ankle-deep in water covering your living room floor is to discover that your home warranty can’t help replace burst pipes. CNBC Select explains how home warranties work and how to decide if you should invest in one.

The major systems and appliances in your home require constant maintenance in order to function properly. But even if you stay on top of things, regular wear and tear can lead to malfunctions. If your home warranty covers the problem, you can file a claim and the provider must pay for the replacement or repair. Typically, you will need to pay a deductible first and your home warranty will take care of the rest of the covered expenses.

Learn about the terms of your home warranty

Every home warranty plan has limits and exclusions. It’s best not to assume what it will or won’t cover – always check your contract to understand what it can help you with. For example, your warranty may pay to replace your refrigerator, but not to move it from your home.

When you file a claim, a licensed technician will come to your home to provide service or repairs. Each time a contractor is dispatched, you will likely have to pay a service call fee which typically ranges from $75 to $125. Depending on the home warranty company, you may be able to choose your own contractor or the company will choose one from its network.

Some providers also allow both options. For example, Select Home Warranty, our top choice for affordable plans, will find a technician for you. On the other hand, America’s First Choice Home Club, which takes second place on our list of the best home warranties, allows you to work with a contractor of your choice but can also find a contractor that works for you.

Similar to an insurance policy, a home warranty contract comes with a set monthly or annual limit. Typically, you can renew your contract after it expires, or you can set the plan to renew automatically.

You can customize what your home warranty covers. In general, providers divide plans into three coverage categories:

  • Main systems. These include your home’s heating, cooling, plumbing, and electrical systems.
  • Main devices. These vary by company but may include a built-in microwave, oven, dishwasher, garage door opener, and garbage disposal. Some providers can also include a washing machine, driver, refrigerator, and water softener.
  • Extras. You may be able to purchase additional coverage for items not included in the standard plan. These may include well, septic, pool, spa, roof (in case of leaks) pumps, and electronics.

Remember, home warranty plans only cover normal wear and tear. For example, if your furnace breaks down due to a manufacturing defect or because it wasn’t installed properly, you may be out of luck. If it is destroyed in a fire, that is a claim to the homeowners insurance provider and not a warranty on the home. You also won’t get coverage for items that have an active manufacturer’s warranty or had a pre-existing problem before the breakdown.

It goes without saying that it’s essential to read the fine print to understand the details of your coverage and how it can protect you.

Maintaining a home can be expensive. Even if you meticulously maintain the major systems and appliances in your home, breakdowns are bound to happen. And if you don’t have coverage, the costs of repairs and replacements can significantly impact your emergency fund. Or, if you don’t have enough savings, you may have to borrow money. A home warranty plan can prevent such a situation and provide peace of mind.

However, like any financial instrument, it is not a perfect solution for every scenario. It may make sense to skip this type of coverage if the systems and appliances in your home are new, since they are likely still covered by manufacturer warranties.

Additionally, a home warranty is only worth it when it saves you money in the long run. High premiums and service fees can exceed potential savings. For this reason, research home warranty companies and collect multiple quotes before signing up for a plan. As with any product, shopping is an essential part of the process when it comes to additional coverage for your home.

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A home warranty can help you save money when you have problems with major systems or appliances in the home. If you’re considering a home warranty plan, be sure to do the math and get several quotes to see if it’s a good move for you — and don’t forget to read the fine print to avoid unpleasant surprises.

At CNBC Select, our mission is to provide our readers with quality service journalism and comprehensive consumer advice so they can make informed decisions about their money. Each insurance guide is based on accurate reporting by our team of expert writers and editors with extensive knowledge of insurance products. While CNBC Select receives a commission from affiliate partners on many offers and links, we create all of our content without input from our commercial team or any external third parties, and we pride ourselves on our journalistic standards and ethics.

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(tags for translation) Personal Finance

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