A home warranty can be a smart financial move, potentially saving homeowners time and money on home maintenance and repairs. However, the upfront and ongoing costs may not always justify the benefits.

Understanding how home warranties work and considering the pros and cons can help you make an informed decision about whether a home warranty is right for you.

What is a home warranty?

A home warranty is a service contract that covers the cost of repairing or replacing your home's mechanical and electrical systems and appliances. It differs from home insurance, which protects your property and belongings against specific events like storms, fires or theft.

Instead, a home warranty focuses on normal wear and tear and repairs of your house’s systems, including HVAC, plumbing and electrical and appliances like refrigerators, washing machines and dryers. Unlike homeowners insurance, a home warranty is optional.

How does a home warranty work?

Home warranties are available through private companies for a fee; sellers sometimes offer a home warranty as an incentive in a sale. Coverage typically lasts for one year and is renewable after the contract ends.

The average home warranty cost is $1,049 per year, though fees can range from about $200 to $1,900, according to HomeAdvisor. Home warranty prices depend on the provider, your location and contract terms. In addition to the upfront cost, you'll pay between $75 and $125 for each claim.

Home warranties are often customizable, allowing homeowners to tailor coverage to meet specific needs. For example, some companies offer add-ons for items like swimming pools. After purchasing a home warranty, coverage usually begins within 30 days. If a covered item breaks down, you file a claim or service request with your provider. They send a vetted technician to diagnose the issue; if it's covered, they’ll arrange for repair or replacement or reimburse you if you have to set it up.

Pros and cons of home warranties

A home warranty offers many benefits, including:

• Lower repair costs: Service call fees can be a fraction of the full price of repairing or replacing an appliance or system.
• Streamlined process: Home warranties save time by offering a simple process when an item needs repair or replacement.
• Extended coverage: They can provide longer coverage than manufacturer warranties, extending protection beyond the initial purchase period.
• Peace of mind: Home warranties ensure that when major home systems or appliances break down, repairs or replacements won’t lead to unexpected costs.

Drawbacks of home warranties include:

• Upfront costs: The initial expense of a home warranty can be substantial, ranging from several hundred to thousands of dollars.
• Overlapped coverage: There may be overlaps with coverage from homeowners insurance or manufacturer warranties.
• Claim denials: Home warranty companies can deny claims for various reasons, such as improper care, leaving you to cover repair costs yourself.
• Coverage limitations: Certain items may have restricted coverage, limiting the extent of protection.

Who should get a home warranty?

Home warranties might be a good idea if you:

• Have an older home and appliances: A home warranty can provide significant savings for homes or appliances over 15 years old.
• Have limited savings for repairs: A home warranty can be a cost-effective way to address repairs if you don't have an emergency fund.
• Prioritize convenience: Home warranties can eliminate the hassle and legwork of arranging repairs yourself, depending on the warranty terms.
• Want peace of mind: A home warranty could be valuable if you want assurance against the cost of unexpected breakdowns.
• Anticipate repairs: A home warranty may be a good choice if you expect home systems or appliances to need repairs or replacement soon.

Home warranties might not be a good idea if you:

• Have a new home: Newly built homes covered by a builder warranty may not need an additional home warranty.
• Have a very old home: If your home is very old and replacement parts are hard to find, a home warranty may not provide much value.
• Have a large emergency fund: If you have enough savings to cover home repairs, you might not need a warranty.
• Have brand new appliances: If your appliances are new and under a manufacturer’s warranty, overlapping coverage may be unnecessary.
• Maintain your home meticulously: A home warranty might not offer significant benefits if you keep up with regular maintenance of your home’s systems and appliances.

How to determine if you should get a home warranty

When deciding on a home warranty, consider whether your home and appliances are already covered by a builder’s or manufacturer’s warranty. You may not need an additional home warranty if these warranties provide sufficient coverage.

Estimate the potential costs of repairs or replacements for your home’s systems and appliances. Knowing whether you can handle those expenses out of pocket will help you decide if a home warranty is of value.

Also, consider the costs and coverage limits of the warranty. Determine whether it will fully cover the cost of replacing items or if there are restrictions on brands or contractors for repairs. Pay close attention to the fine print as some coverage limits may be hidden.

While a home warranty comes with upfront costs, it could pay for itself if you face a major repair, making it a cost-effective option for protection against expensive, unexpected bills.