What Does a Residential Service Contract Cover?

Residential service contracts, also known as home warranties, are an agreement between a homeowner and a company to cover costs when certain home items wear out. If a covered home system or appliance breaks from wear-and-tear damage, the home warranty company will typically pay for repairs or replacements.

These contracts can help save homeowners money on expensive repairs and replacements on major home systems and appliances. However, different companies offer different types of coverage, and no home warranty covers every type of damage. We’ll give details about service contracts, including how they work, what they cover, and what you can expect to pay. We’ll also identify who we recommend as the best home warranty companies.

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What Is a Residential Service Contract?

A residential service contract is a policy that states a company will cover a homeowner’s repair and replacement costs for covered home systems and appliances that face mechanical breakdowns resulting from normal wear and tear. This service contract is optional for homeowners and frequently called a home warranty or home service contract. It is different from homeowners insurance or manufacturer warranties.

The term residential service contract is commonly used in Texas and is defined as a service where, for a fee and for a specified period of time, a company agrees to repair or replace covered appliances or systems in a residential property. Texas real estate contracts also have a clause where home sellers can specify how much they will pay toward the buyer’s purchase of a home warranty contract if they agree to pay for all or part of the contract as part of the negotiation process.

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When Can I Purchase a Residential Service Contract?

Most home warranty companies allow you to purchase a contract at any time during homeownership. However, sellers may find that the inclusion of a home warranty improves the value of their home, and buyers may experience increased peace of mind knowing that they may not need to pay for repairs or replacements in their new home. Thus, home warranties are often part of real estate transactions.

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What’s Covered Under a Residential Service Contract?

Covered items typically fall into one of three categories: appliances, systems, and add-ons. Here’s what’s commonly covered under a residential service contract.

Add-ons are optional extras that don’t receive coverage under standard contracts, but you can pay an extra fee to have these items covered. Common add-ons include your pool, spa, an additional refrigerator, roof leaks, well pump, sump pump, septic tank, alarm system, and guest units.

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What Isn’t Covered in a Residential Service Contract?

While most home systems and appliances are covered under a residential service contract, there are certain features of a home that don’t receive coverage, such as:

• Garage doors/door tracks
• Ornamental fountains
• Sprinkler systems
• Window air conditioning units
• Windows, walls, and doors

It’s also important to note the types of damage that home warranties don’t cover. If a covered appliance or system suffers from one of the following types of damage, you’ll typically be responsible for the full cost of repairing or replacing it:

• Damage from accidents or misuse
• Improper installation, modification, or repairs
• Insufficient maintenance
• Pre-existing conditions (known or unknown)
• Rust, corrosion, and sediment

Many residential service contracts cover similar items and types of damage, but it’s important to read your contract before signing up for coverage so you understand what exactly is and isn’t covered. Patrick Grayson, who is associated with Paramount Property Buyers, a real-estate business based in Indianapolis, says, “When shopping for a home warranty, consider the coverage that each company offers and make sure it fits your needs. Some companies may offer more coverage than others, so make sure to compare all your options.”

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How Long Does a Residential Service Contract Last?

A typical residential service contract lasts for a year, though some providers may offer multi-year warranties for a more affordable price. Most providers allow you to continue to renew coverage year after year. Coverage generally begins 30 days after the first payment is made. If a covered item breaks during this waiting period, the customer will have to pay for any necessary repairs.

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How Much Do Residential Service Contracts Cost?

With a residential service contract, you’ll be responsible for two types of costs: premiums and service call fees.

A premium is the amount you pay every month (or year) of the contract. Typically, this will run you $45–$72 a month, or $540–$865 a year, depending on how comprehensive your coverage is. The service call fee is what you pay every time you make a claim and a technician visits your home to repair or replace your broken item. The industry standard service fee ranges between $75 and $125.

Some companies, like American Home Shield or America’s First Choice Home Warranty allow you to adjust your service fee relative to the amount of your premium. If you’re willing to pay a higher service fee, you can pay less for your premium and vice versa. The service fee works like an insurance deductible, reducing your upfront payment in return for a higher cost if you actually need a repair. You can choose the amounts based on how often you expect to submit claims.

You should also be aware of the maximum payouts and coverage caps that come with your contract. The fine print will likely specify a maximum payout for the year—usually between $3,000 and $10,000—and there may be coverage caps for individual appliances or systems. For example, since an HVAC system is one of the more important systems in your house, a warranty provider may place a cap of $1,500 on repairs to the system in the course of a year.

Your service call fees don’t count toward this maximum, but if you do exceed the cap within the lifespan of the contract, you will need to pay for any further repairs. These caps also mean that a home warranty may not cover the entire replacement cost of a very expensive system or appliance. Note that budget-friendly plans often come with lower coverage caps.

We’ve presented an average price range for residential service contracts because costs will vary for a number of reasons. As a homeowner, you’ll have control over some of these variables but not others.

1. The level of coverage—The more coverage you have, the higher the home warranty cost will likely be.
2. Your location—You may pay more for a home warranty if you live in an area with a high cost of living, since it might cost the home warranty company more to send a repair technician to your home.
3. Payment frequency—You might get a discount if you pay the premium in a lump sum for the year rather than making monthly payments.
4. The length of contract—Some residential service contracts offer a multi-year discount.
5. The service fee—Some warranty companies offer a lower annual premium if you’re willing to pay more for service calls.

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How Do Residential Service Contracts Work?

If you have a residential service contract, your first call should be to your provider when a covered item breaks down from wear and tear damage. You’ll file a claim, and the warranty provider will send contractors to diagnose, repair, or replace the damaged appliance or system. You’ll pay the service call fee directly to the contractor like a co-pay, but if the damage is covered, the provider will pay the remainder of the costs up to the coverage cap.

Residential service contracts are sometimes confused with homeowners insurance or manufacturers warranties, but they are separate policies. Homeowners insurance covers damage to a house from natural disasters or theft. A manufacturer’s warranty covers defects in a newly-purchased product. Residential service contracts cover major appliances or systems within a home against normal wear and tear.

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How to Make a Residential Service Contract Claim

The process for submitting a home warranty claim is quite simple and remains more or less the same across the industry.

1. Contact your home warranty provider with information about the problem. Most companies offer an online portal or a toll-free number that customers can use to submit claims 24/7, 365 days a year. Keep in mind, however, that this doesn’t mean the company will contact a technician immediately—you must wait until normal business hours to receive service if you submit a claim on nights or weekends.
2. The company contacts a local technician who will then schedule an appointment with you. Most home warranty companies have their own network of vetted, qualified technicians, saving you the trouble of having to find a trustworthy contractor. However, companies like AFC Home Warranty allow you to choose your own contractor as long as they are certified, licensed, and bonded.
3. The contractor schedules an appointment to come to your home to diagnose the problem. You will pay them the service call fee before they leave your home.
4. The provider determines whether the problem is covered by the contract. Sometimes, this can be done over the phone while the contractor is in your home. The provider will need to verify that the broken item is covered and the damage is due to normal wear and tear. If both these conditions are met, you will not be responsible for the repair or replacement costs.
5. The provider sends the contractor back to your home to fix the problem. If the contractor doesn’t have a necessary part or if the entire appliance needs to be replaced, the contractor will need to make a separate visit to fix the problem. You’ll pay another service call fee for this visit.

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Recommended Residential Service Contract Providers

When choosing between home warranty companies, Peter Evering, a business development manager for Utopia Property Management, says, “Reading customer reviews and ratings can provide insights into the experiences of other homeowners and help you gauge the level of customer satisfaction.” We’ve spent over 4,800 hours researching residential service contract providers and read over 5,700 reviews in order to make our recommendations.

American Home Shield

Our top overall pick goes to American Home Shield (AHS). Depending on where your live and the plan you choose, you may pay anywhere from $20 to $150 per month. However, the company covers types of damage that most others don’t, including unknown pre-existing conditions, rust, and corrosion. Additionally, AHS’s most comprehensive plan, ShieldPlatinum, comes with an extremely generous $4,000 coverage cap on each appliance. Read our in-depth American Home Shield review for more information.

Liberty Home Guard

Liberty Home Guard is another recommended provider based on its outstanding A+ rating from the Better Business Bureau (BBB) and its balance of comprehensiveness and affordability. Its three residential service contract plans cover appliances, systems, or both, and the company offers more than 40 add-ons for extra coverage—more than any other company. Plans cost $50–$70 per month in most locations, and all come with a 60-day workmanship guarantee, which is double the industry standard of 30 days. Read our complete Liberty Home Guard Review to learn more.

Select Home Warranty

Finally, for homeowners with a stricter budget, Select Home Warranty offers modest coverage at affordable prices. Plans cost $44–$50 per month and come with up to $400 of roof-leak coverage. If you opt for the Gold or Platinum Care plans, you’ll receive a $3,000 coverage cap on HVAC and central air conditioners.

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Conclusion

If you’re worried about your home’s key appliances or systems breaking down from wear-and-tear damage, a residential service contract can offer you peace of mind and budget protection. Since these plans vary in cost by company and plan, we recommend getting quotes from at least three home warranty providers before making your choice. Always read the fine print, and choose the coverage that best fits your needs and your budget.

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FAQ About Residential Service Contracts

How much is a residential service contract?

A residential service contract requires a monthly premium payment, usually between $45 and $72. This works out to around $540 to $865 a year. You’ll also pay a service call fee of between $75 and $125 every time a technician visits your home.

Is a home warranty worth it?

No matter how well you maintain your appliances and home systems, components will wear down eventually from regular use. If the appliance or system is covered, a home warranty company will pay for the necessary repairs and reduce your out-of-pocket costs.

Is a home warranty required at closing?

Although a home warranty isn’t required during closing, it can act as both protection for the seller and an enticement for the buyer. The seller is assured that they won’t pay for wear and tear damage during the listing period, and the buyer can rest easy knowing that they won’t have to pay high costs for unforeseen problems with the new house.

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Our Rating Methodology

We back up our home warranty ratings and recommendations with a detailed rating methodology to objectively score each provider. We conduct research by speaking with company representatives, requesting quotes, analyzing sample contracts from each company, and conducting focus groups and consumer surveys. We then score each provider against our review standards for coverage, cost, trustworthiness, plan transparency, customer support, and flexibility to arrive at a final score on a 5-point rating scale. To share feedback or ask a question about this article, send a note to our Reviews Team at reviews@thisoldhousereviews.com