What does a home warranty coverIf you are looking to buy a home, you may have heard your real estate agent mention the home warranty as a selling point. Contrary to the name, home warranties don’t cover the actual structure of the house. Instead, a home warranty will help defray the costs if a major component in the house fails.

“It’s like having life insurance, it’s good for peace of mind,” says Frank Lesh, the executive director of the American Society of Home Inspectors.

What is a home warranty?

A home warranty is a contract between a homeowner and a warranty company that provides for discounted repair and replacement service on a home’s major appliances, such as the furnace, the air conditioning unit, and the plumbing and electrical systems. It may also cover other items, such as washers and dryers, garbage disposals, refrigerators, and swimming pools.

Homebuyers typically use a home inspection to ascertain the state of the appliances, but it may be tough to tell how the appliance has been used or if it will stay intact. A home warranty is financial protection against unforeseen repairs. It can cost from $400 to $600 a year and will cover the house from three months to a year, depending on the coverage plan. In addition to the yearly cost, the homeowner is responsible for a deductible or premium if he or she needs a service provider.

A home warranty can be particularly helpful for buyers purchasing an old home where the appliances may be faulty. “It provides comfort and peace of mind,” Lesh says, but it certainly isn’t a replacement for homeowner’s insurance.

How is a home warranty different from insurance?

“Insurance is typically [for] a catastrophic loss,” Lesh says. Homeowner’s insurance covers the house itself and your personal possessions in case of fire, theft, or damage from another cause, whereas home warranties offer discounted repairs to and replacement of broken mechanical components and appliances in a home.

What does a home warranty cover?

“A home warranty covers normal wear and tear, or if the thing just breaks down,” Lesh explains.

When an appliance breaks, the warranty company will send out a service provider to inspect the damage and determine whether or the not the repair is covered by the warranty. The service provider may fix the appliance immediately or the homeowner may have to pay a larger deductible, depending on the seriousness of the repair.

One notable exception: If a home inspector noted something as faulty before the house was sold, it is not usually covered by the warranty.

“You can’t expect them to replace a leaky water heater if the inspector noted the water heater is leaky,” Lesh says.

(Read more: Buying a Home? Tips for Finding a Good Home Inspector)

Should I purchase a home warranty?

Often, a real estate agent or seller will purchase a home warranty as a selling tool. As soon as the home is sold, the warranty coverage will transfer to the next homeowner, thereby offering the new owner more coverage. Newly built homes generally have a one-year warranty when they’re sold.

In the case of an old home, which may not have a warranty, purchasing one may offer some financial security because a warranty is typically far less expensive than replacing an appliance. (However, with a home warranty, the homeowner doesn’t get to control the brand of replacement appliance or how an appliance is fixed.)

“I always tell my clients to have a re-inspection 11 months after they move in because that’s usually just when the warranty is up and they can see the status of everything,” Lesh advises.
When deciding whether to purchase a home warranty, thoroughly inspect the terms of your agreement. The coverage and the cost of the deductible will change depending on the plan.

“With a home warranty, it doesn’t matter what happened so long as it is covered in the terms of the agreement,” Lesh says, “but you have to read the fine print.”

Ilyce Glink is the author of over a dozen books, including the bestselling 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!