What is a Home Warranty and How Does it Work?

Comparing home protection plans

It’s important to know the difference between a home warranty, homeowners insurance, and a manufacturer’s warranty. All three are important in helping you deal with unexpected issues that could be costly, but each provides peace of mind in different scenarios.

How a home warranty works

Here’s how a home warranty works in a nutshell:

1. The homeowner will file a claim with the home warranty company via phone or online.
2. The home warranty company will approve the claim if the item is A) covered under the home warranty plan and B) has broken from normal wear and tear.
3. After approving the service request, the home warranty provider will schedule an appointment with a certified technician within its pre-approved network on behalf of the homeowner.
4. The technician will assess the problem to decide whether the item should be repaired or replaced.
5. The homeowner will pay a service fee to the technician. If the home warranty plan does not cover the full cost of a repair or replacement, the homeowner will also pay the remaining balance. Read your contract for full details on the exclusions and limits of your plan.

Now, imagine waking up to a broken water heater that’s not churning out hot water as it should. What do you do?

How to file a home warranty claim

First, you’ll call the warranty company or request service online. Keep in mind, home warranties only cover the system or appliances that are explicitly written into the contract when they break from normal wear and tear. Fortunately, water heaters are a commonly covered home appliance.

Note: The warranty company can deny a claim for issues caused by improper installation or insufficient maintenance. For example, routine maintenance of a water heater means regularly flushing the tank to reduce and remove sediment buildup.

If your appliances have not been correctly installed or maintained, we recommend going with First American, as it’s the best home warranty for limited exclusions.

The claims process usually takes 12 to 48 hours, but it can take longer on weekends and holidays.

Can I choose my own technician?

If the claim is approved, the provider will send out a service technician from its network of approved professionals.

It’s important that the homeowner does not hire their own home contractor and expect to be reimbursed by the home warranty company. The majority of home warranty providers require service to be carried out by a pre-approved network of contractors.

If you have a trusted contractor already, some warranty companies—like America’s 1st Choice Home Club—have the option of having your preferred repair technician enter their networks. However, if something breaks down, never call someone who isn’t approved by your home warranty provider to do your repairs because the warranty company will not reimburse you.

Repair vs. replacement

On their first visit, the technician will evaluate the problem with the water heater and fix it if possible. The average cost of repairing a water heater is $546. If the contractor can’t repair the water heater during the first appointment, they’ll submit a recommendation to the home warranty company.

You’ll have to pay a service fee—usually $75–$125—for that first visit. The best home warranties do not charge another service fee for a second visit within a certain timeframe but you’ll have to read your contract to find out.

Then, the contractor will schedule a time to return and fix the problem. As with any repair, you may have to wait for parts to be ordered and delivered.

If the technician determines that the covered appliance cannot be repaired, your provider might offer you a replacement depending on the terms of your home warranty plan. The average cost to replace a water heater is $1,065 including materials and professional installation.

Refer to your contract to find out whether the home warranty company covers full replacement costs or if it only partially covers the broken item. The average payout on a water heater repair or replacement is $1,037, which would cover all but $28 of the average bill.

Exclusions and limits apply

There will be limits on how much the home warranty company will pay for a replacement. We consider coverage limits $500 per item to be reasonable but some providers, like American Home Shield, have generous pay-outs up to $3,000 per appliance.

Additionally, the contract only covers replacement items of the same standard. The provider is not liable for matching the brand, model, or color of the water heater—or any other broken item you request service for—and you won’t be able to upgrade to a higher quality unit.

Read your contract closely, as it should list all of these limits and exclusions in detail.

Read before you sign

A home warranty is a contract and, like all contracts, you need to read it closely to see exactly what is—and isn’t—covered. Companies should have sample contracts available on their websites. These are usually found in a frequently asked questions page or labeled in the footer as Terms and Conditions.

Here’s some key information to look for when you’re reviewing a contract:

• What appliances and systems are covered? Make sure your older items are covered.
• Is anything excluded that you would like to see included? If so, ask if you can add on coverage for an extra fee.
• Does the age of the system or appliances matter? The answer should be no.
• Is there a limit to the amount the company will pay out for replacement appliances? Is there a cap on much it will pay for specific items, and there is a cap on how much the warranty covers in a year? Coverage caps for all major appliances and systems should be $500 or more. Watch out for cheaper premiums because they usually result in stricter coverage.
• How does the contract define normal wear and tear? This should be front and center at the top of the contract.
• What reasons could the company use to deny a claim? What recourse do you have if your claim is denied? Improper installation and inadequate maintenance are common reasons for denied claims. Read the fine print the company uses to define each reason.
• Does the company’s network of service technicians include people in your location? When something breaks, you’ll want the issue resolved as quickly as possible. If the provider doesn’t have any contractors close by, you might not want to risk the wait time.

How long does a home warranty last?

Home warranties last one year. Customers can either pay for the full year upfront or they can pay in monthly installments.

Pricing for home warranty plans is apt to increase year after year. You might be able to lock in a price for the lifetime of your home warranty by opting into three- to five-year coverage.

If you’re hesitant to pay for a one-year home warranty plan, don’t be. You can cancel at any time and you’ll be refunded for the pro-rated amount of what’s remaining from your plan.

For example, you might sign up for a three-year home warranty plan but want to cancel after the second year. You’ll be refunded the amount for the remaining year of the contract term.

Is there a waiting period for a home warranty?

There’s usually a 30-day waiting period between when you sign up for a home warranty and when coverage begins. Keep this in mind if you’re switching from one provider to another. Note: you can renew the policy annually with no waiting period. We recommend The Home Service Club if you need faster coverage, as it only has a 10-day waiting period.

Do I need a home warranty?

If you’ve landed on our guide to home warranties, you’ve likely already asked yourself—should I get a home warranty? While anyone can benefit from a home warranty, the plans are more beneficial to certain groups of homeowners.

First-time buyers–Buying your first home is scary enough without having to worry whether the water heater is going to flood the basement. When you’re purchasing your first home, you’re often stretched for cash, so the cost of a warranty is a small price compared to the cost of replacing the heating system. Ask if your real estate agent can get the seller to include a home warranty before you buy or include it in the negotiations.

Owners of older homes–As appliances and systems age, you know they’re eventually going to need repairs no matter how well you maintain them. You can’t know exactly how long anything will last, but the International Association of Certified Home Inspectors estimates a furnace lasts about 15 years and a refrigerator averages about 10 years. You might want to purchase a warranty before your home nears those estimates.

Home sellers–The last thing a seller wants is to deal with costly repairs after they’ve put their home on the market. A seller can purchase a plan that covers the home while it’s listed for sale, then transfer the policy to the buyers. Offering a home warranty with the purchase also helps to entice buyers, especially if the home has a few years on it. A home warranty also makes the home more attractive to a first-time buyer, who might not have much experience in dealing with home repairs.

Real estate agents—Realtors can use home warranties to expedite the closing process. Home warranty plans are great incentives for home buyers who are anxious about potential repairs. As a listing agent, it can also ease your mind if the sellers who you’re representing can fix issues that come up while the house is for sale.

Rental property owners—Home warranty coverage also lends peace of mind to rental property owners who rent houses to tenants, like college students. If you lease out multiple properties, you can streamline maintenance by requesting service online or through an 800 number that’s usually available 24/7. The home warranty provider will send out a licensed contractor for you, saving your small management team time, money, and energy.

If you live in a newly built home, if you’ve recently renovated with all new systems and appliances, or if you have a large emergency fund on-hand to cover repair costs, you might decide a home warranty isn’t necessary for you.

How to get a home warranty

Many companies offer home warranties, so you may have to do a little shopping to find the one that’s right for you. Follow these steps.

1. Read reviews to find the best home warranty companies. Remember, however, that a five-star rating isn’t everything. If a company only has three reviews, it might not have been in business long enough to have a real track record. Or if the company has been in business for decades—like American Home Shield—they may have started responding better to customer complaints years ago. The Better Business Bureau is another source of information.
2. Ask your real estate agent about their experience with home warranties companies. It’s likely an agent will have had experience with a number of warranty companies, so they can provide recommendations based on real client experience.
3. Visit the website of several companies that rate highly and see what’s covered. If the exclusions concern you, ask if you can add items to the coverage list.
4. Consider costs including the premium and the service fee charged for each visit.
5. Prioritize customer service by looking for a company with a 24/7 service line and the ability to enter service orders online. Your furnace can stop working at any time of the day or night, and you want to be able to schedule a service call as quickly as you can.

Which home warranty company should I choose?

House Method reviewed dozens of home warranty companies based on the criteria above. Below are the top five companies with the highest number of reviews to give us a broad overview of the providers and the kind of experiences their customers have had.