Whether a home warranty is worth the paper it’s written on is a matter of debate. Some people in the real estate, financial and consumer protection industries laud them. Then there are those who say not to waste your money on a home warranty.

One of these is consumer expert Clark Howard, who says that “for six years running, home warranty companies have led a list of the most complained about companies in America. . .”

The complaints occur, say some, because homeowners aren’t aware of how warranties work and they therefore have inflated expectations of these plans. If you’ve either purchased or were gifted with a home warranty, it’s important to understand how they work and what they do and don’t cover.

It’s not Insurance

The first thing you need to know about home warranties is that they are neither insurance nor warranties. They are, in reality, service contracts.

The idea behind the home warranty is to protect homeowners from financial catastrophe when a major system in the home malfunctions or comes to the end of its useful life.

What Does a Home Warranty Cover?

What is covered under the home warranty varies by company and by price. The basic warranties, at least the great majority of them, cover the following:

• Electrical system
• HVAC System
• Major appliances
• Plumbing

What a Home Warranty won’t Cover

What is not covered by the home warranty reads a bit like a health insurance policy:

• Pre-existing conditions
• A breakdown due to “normal wear & tear”
• Improperly maintained items
• Damage from insects or other pests
• Homeowner-caused issues
• Problems created by structural defects in the home (leaky roofs, etc.)
• Natural disasters (flood, hurricane, earthquake, etc.)

You might Need Optional Coverage

If you want coverage for the items listed below, you’ll need to ask and pay extra for it:

• Central vacuum system
• Pool
• Septic system
• Spa
• Well pump

How the Process Works

The average nationwide cost of a home warranty ranges from $380 to $500 a year, according to Realtor.com, with the cost of an upgraded plan adding $100 to $300.

When something goes wrong, you’ll call the service department who will contact one of their contracted technicians. This technician will bill the home warranty company, not you.

You will, however, be required to pay a service fee ― typically $55 ― every time a technician visits the home.

Are they worth it?

Again, this depends on who you ask. Many real estate professionals swear by them and find their true value during the first year a homeowner is in the home and may be cash-poor. A major system malfunction may devastate finances so a home warranty offers both peace of mind and financial security.

Consumer Reports, on the other hand, begs to disagree, saying “Even the best service contracts typically aren't worth the cost. Put your money in the bank instead.”

We think it depends upon your risk tolerance. If you’re insecure about the home’s systems then we think a home warranty will give you peace of mind.