When you purchase a home, even if the home isn't brand new, it's very likely that you'll be offered a home warranty. In many cases, the seller will offer to pay for the first year of such a warranty, but in some cases if you choose to purchase one, you'll be paying for it yourself. But, what is a home warranty, and do you really need one?
Put simply, a home warranty is a contract between yourself and a home warranty company that allows you to get discounted repair and replacement services on the major components of your home (plumbing, electrical systems, air conditioning, heating systems) and major appliances like refrigerators, washers, dryers, dishwashers, and swimming pools. In exchange for this warranty coverage, you'll pay an annual fee, either as a lump sum, or in installments.
If you have a covered system or appliance break down, your home warranty company will arrange for an affiliated contractor to come and look at the problem, and, if approved, do the work. Usually you'll pay a flat fee for these service calls, unless extensive work is required. A broken pool pump, for example, would be covered by just the service fee if your pool equipment is part of your warranty coverage, but if a water heater fails, and replacement requires bringing connections and wiring up to code, you'll pay the difference.
While it's true that there are some years when nothing will break and you won't use your home warranty, it's also true that a major system failure that is repaired under warranty will make you feel that it has "paid for itself."
However, home warranties are not the perfect solution to every system or appliance breakdown. There are limitations in coverage (garage door openers, for example, are rarely covered, and while pool pumps can be covered, pool vacuums are almost never included) , maximum dollar amounts of repairs per year, and a nearly universal clause that you, the homeowner, are responsible for keeping systems and appliances in good working order.
It's also important to remember that a home warranty is not a substitute for homeowners insurance. Insurance covers the replacement cost of your entire home and the contents therein. A home warranty provides limited coverage for specific systems and items. Insurance covers you in the event of natural disasters. If your refrigerator is killed by a lightning strike, insurance may cover it, but a home warranty will not.
As well, home warranties require that you use the warranty company's contractors. In many cases, these contractors are respectable and reliable, but many give the lowest priority to warranty calls, and as a homeowner, you lose the freedom of choosing your own repair service and forging a relationship with it.
Are home warranties worth it? If you are bad at saving money for emergencies, but good at basic upkeep of appliances and systems, they probably are, but if you have a decent amount of saved cash, you may want to skip the warranty and boost the contents coverage of your homeowners insurance, instead.