If you stop and think about it, your basement can be a scary place.

Not in the “there’s a monster in the basement!” kind of way. More in the “if something down there breaks, I can’t pay for it” sense. For example, if your hard-working sump pump breaks down, it can cost as much as $2,000 to replace it. Yikes!

This alarming possibility is the main incentive for purchasing a home warranty: it offers peace of mind against the threat of unexpected problems. But not everyone is crystal clear on what a home warranty actually is. We’re here to set you straight!

What is a Home Warranty?

A home warranty works the same way a car or computer warranty does: you pay a company an annual fee, and in return they agree to cover the cost of replacing or repairing certain items. A basic home warranty will usually cover the following things: plumbing, HVAC, electrical and major appliances (such as the refrigerator and dishwasher). Note: A home warranty does not eliminate the need for a homeowners insurance policy! Insurance will protect you from natural disasters (such as fires or floods) while a warranty only protects you from damage due to normal use.

How Much Does a Home Warranty Cost?

A typical home warranty policy will cost $300-$450 a year, and can go higher than $500 if you have a lot of extras (such as a pool) that you’d like covered. This annual premium does not cover the cost of individual service visits, which typically run anywhere from $50-$100. So if you have three or four incidents in a year, your out-of-pocket expenses can quickly double.

Note: Many home warranty companies don’t allow you to combine service calls. That means if your refrigerator and sump pump break at the same time, you’ll need to pay two service fees.

Is a Home Warranty Right for You?

Some experts swear by home warranties, while others recommend against them, citing common home warranty pitfalls. We say, it depends on your specific situation. There are two main factors to consider:

1. The status of the house you’re buying. If you’re not confident in the quality or previous maintenance of the house you’re buying, a home warranty can be really comforting. In fact, some sellers will offer a fully-paid one-year warranty to buyers for this exact reason. Just note that home warranty companies can sometimes deny coverage for pre-existing conditions or poor maintenance (whether you or the previous owner were at fault isn’t necessarily relevant). So getting a warranty doesn’t make you immune to these problems.

Also, if the house has expensive appliances (think: $10,000 fridge), a home warranty is probably a smart investment when you consider potential replacement costs.

2. The status of your savings account. It’s not uncommon to virtually deplete your life savings to cover the down payment of a home (especially for first time homeowners). When cash is tight, it can often make more sense to pay a few hundred bucks up front instead of risking a few thousand dollars in repairs. However, if you have a healthy emergency house fund – and feel confident you can cover unexpected costs yourself – you may save money in the long run by skipping a home warranty and simply relying on your personal savings.

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