Your homeowners insurance covers your home in case of major perils like fire, theft or hail. It's usually mandatory when you have a mortgage. But if you want extra financial protection for normal wear and tear, you'll need additional coverage — and that's where a home warranty comes in handy.

A home warranty is a coverage plan for major systems and appliances in your home, such as your water heater, HVAC, and plumbing. The plan can help you get service, repairs or even a replacement, saving you money and stress when something (inevitably) breaks.

However, not all home warranties cover the same things. And the last thing you need when standing ankle-deep in water covering your living room floor is to discover your home warranty can't help replace your burst pipes. CNBC Select explains how home warranties work and how to determine if you should invest in one.

What to know about home warranties

How does a home warranty work?

Major systems and appliances in your home require ongoing maintenance to work properly. But even if you stay on top of things, regular wear and tear can result in breakdowns. If your home warranty covers the issue, you can file a claim and the provider should pay for replacement or repair. Typically, you'll need to pay a deductible first and your home warranty will take care of the rest of the covered expenses.

Know your home warranty terms

Each home warranty plan has limits and exclusions. It's best not to assume what it will or won't cover — always check your contract to understand what it can help you with. For example, your warranty might pay to replace your fridge — but not to haul it from your house.

When you submit a claim, a licensed technician will come to your home to provide service or repairs. Each time a contractor is dispatched, you'll likely have to pay a service call fee which normally ranges from $75 to $125. Depending on the home warranty company, you might be able to choose your own contractor or the company will pick one from their network.

Some providers also allow for both options. For example, Select Home Warranty, our top choice for affordable plans, will find a technician for you. On the other hand, AFC Home Warranty, the runner-up on our list of the best home warranties, lets you work with a contractor of your choosing but can also find one for you.

Select Home Warranty

  • Plans available

    Three

  • State coverage exclusions

    Not disclosed

  • Service fee

    $60 to $75

  • Membership benefits

    Discounts on all plans

Terms apply.

AFC Home Warranty

  • Plans available

    Four

  • State coverage exclusions

    Hawaii

  • Service fee

    $75, $100 or $125

  • Membership benefits

    Discounts on insurance, home security, electronics coverage, household goods and more

Terms apply.

Similar to an insurance policy, a home warranty contract comes with a set monthly or annual term limit. Usually, you can renew your contract after it expires, or you can set the plan to renew automatically.

What does a home warranty cover?

You can customize what your home warranty covers. Generally, providers break down plans into three coverage categories:

  • Major systems. These include the heating, cooling, plumbing and electrical systems of your home.
  • Major appliances. These vary by company but may include a built-in microwave, range, oven, dishwasher, garage door opener and garbage disposal. Some providers can also include a washer, driver, refrigerator and water softener.
  • Add-ons. You may be able to purchase additional coverage for items not included in a standard plan. These may include well and septic pumps, pool and spa, roof (in case of leaks) and electronics.

Remember that home warranty plans only cover normal wear and tear. For instance, if your oven broke down due to a manufacturing defect or because it wasn't installed properly, you may be out of luck. If it was destroyed in a fire, that's a claim for your homeowners insurance provider rather than a home warranty. You also won't get coverage on items that have an active manufacturer's warranty or that had a pre-existing issue before breaking.

Needless to say, it's crucial to read the fine print to understand the details of your coverage and how it can protect you.

Is a home warranty worth it?

It can be expensive to maintain a home. Even if you meticulously maintain your house's major systems and appliances, breakdowns are bound to happen. And if you don't have coverage, the costs of repairs and replacements can make a huge dent in your emergency fund. Or, if you don't have enough savings, you might even have to borrow money. A home warranty plan can prevent such a situation and offer peace of mind.

Still, like any financial tool, it's not a perfect solution for every scenario. It might make more sense to skip this type of coverage if the systems and appliances in your home are new, since they're probably still covered by manufacturer warranties.

Additionally, a home warranty is only worth it when it can save you money in the long run. High premiums and service fees can surpass potential savings. For that reason, research home warranty companies and gather multiple quotes before you sign up for a plan. Like with any product, shopping around is an essential part of the process when it comes to extra coverage for your home.

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Bottom line

A home warranty can help you save money when you have issues with major systems or appliances in the home. If you're considering a home warranty plan, make sure to do the math and get several quotes to see if it's a good move for you — and don't forget to read the fine print to avoid unpleasant surprises.

Why trust CNBC Select?

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every insurance guide is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insurance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.