Residential Service Contract vs. Home Warranty (2023)

A residential service contract is a plan a homeowner purchases from a third-party company that covers repairs to or replacements of home systems and appliances. A true home warranty — also known as a builder's warranty — is provided by the building company and covers materials and home defects caused by poor workmanship. However, the terms "home warranty" and "residential service contract" are used interchangeably to refer to the policy covering home system and appliance breakdowns.

The best home warranties protect your budget from the expense of an unexpected HVAC breakdown, a plumbing issue or even a roof leak. In this guide, we at the Guides Home Team explain everything you need to know about residential service contracts, including how they work and what they cover.

A residential service contract, or home warranty, covers a home's major systems and appliances after their manufacturer's warranties have expired. By signing the contract, the homeowner agrees to pay the specified monthly or annual premium. In exchange, the home warranty company agrees to cover the repair or replacement costs for items listed in the policy. Some home warranties also help with routine maintenance costs, such as annual HVAC system tuneups.

Most home appliances come with one-year manufacturer's warranties that cover mechanical failures caused by manufacturing defects. The retailer or manufacturer may also offer an extended warranty at an additional cost. A home warranty can serve as a replacement once the original warranty expires.

Regardless, the basic premise is the same. When a covered item breaks down due to normal wear and tear, the homeowner pays a flat service call fee, and the warranty provider covers the remaining cost of repair or replacement. This lowers your out-of-pocket costs and provides you peace of mind. Many home warranties are purchased during a real estate transaction and may be paid for by either the home buyers or sellers, depending on the market.

In general, residential service contracts cover home system and appliance breakdowns that result from normal wear and tear. Homeowners can choose from three types of plans:

After choosing a base plan, homeowners can consider optional coverage for other items. For instance, many companies offer add-ons for stand-alone freezers, additional refrigerators, guest units, pools, electronics, lawn sprinklers, septic systems and well pumps. Available add-ons will vary from one company to another.

Before signing a home warranty contract, read the fine print — including coverage limits and exclusions — to understand what the policy does not cover. Most home warranties exclude items that have been improperly installed, modified, poorly maintained or misused. A policy may further specify a few types of damage it will not cover or cap its coverage for particular items at a certain dollar amount.

Residential service contracts have two different costs. The first is the premium. Although most homeowners pay a monthly premium, some companies offer a discounted rate to those who pay for the entire year up-front. The second cost is the service fee. This is a predetermined amount that you must pay when a covered item requires repair or replacement.

When something covered by your service agreement breaks down, you will file a claim with the home warranty provider. Most companies will then assign your claim a qualified local technician and schedule a service appointment on your behalf. This approach is especially convenient if you are new to the area or don't have the time to find a technician on your own.

Alternatively, the service company may allow you to choose your own technician, which is an attractive option if you already have someone you know and trust. Some companies, such as America's First Choice Home Club, offer this option every time. Other companies may only allow you to hire a technician yourself if none of their in-network technicians are available.

Either way, you will be responsible for paying the service call fee listed in your contract. The technician will submit a diagnosis and propose a course of action. If the warranty company approves the assessment, the technician will complete the service. Typically, the warranty company will pay the technician directly. You are only responsible for the service fee and any home repairs not covered by your warranty.

Residential service contracts and homeowners insurance both offer important protection for your home. However, there are key differences in what they cover and when that coverage applies.

A residential service contract covers issues that result from normal wear and tear. If your air conditioner stops blowing cold air or your dishwasher displays an error code, you would call your home warranty company.

A homeowners insurance policy, meanwhile, covers damage or loss caused by singular events, including natural disasters and theft. If a storm damages your outdoor AC unit or your dishwasher is destroyed in a fire, you would call your home insurance company.

It's also important to note which items are covered by each policy. Residential service contracts generally limit coverage to select systems and appliances. Homeowners insurance, on the other hand, can cover your entire home and its contents. This includes structural elements, such as windows and doors, that are excluded by your home warranty.

Learn more: Home Warranty vs. Home Insurance: What's the Difference?

In our quest to find the best providers, we researched and compared dozens of home warranty companies. After ranking and reviewing providers based on their cost, coverage and other key factors, we recommend American Home Shield as our top pick.

American Home Shield (AHS) offers three home warranty plans: ShieldSilver, ShieldGold and ShieldPlatinum.

ShieldSilver covers 14 home systems, and ShieldGold covers those same systems plus nine major appliances. Upgrading to ShieldPlatinum gives you a few additional benefits, such as up to $1,500 of roof-leak repair per year. This plan also raises the coverage limit from $3,000 to $6,000 per appliance and adds $1,000 of coverage for code violations, permits and modifications.

American Home Shield covers a few things that most home warranty companies exclude. These coverages include undetectable preexisting conditions, improper installations and duplicate appliances. AHS will cover items regardless of their age or maintenance record and sets no dollar limits for its home systems coverage.

Customers can choose from three service call fees: $75, $100 or $125. A higher service call fee means a lower premium, with each $25 adjustment decreasing your monthly rate by $10.

Compare sample monthly premiums in the table below. These prices are based on a quote requested through AHS’ website for a 2,000-square-foot, single-family home in Cary, N.C.

Get your quote: For a free quote, fill out American Home Shield's quick form.

To learn more: American Home Shield review

Although there are technical differences, the term "residential service contract" is typically used synonymously with the term "home warranty." When most companies and homeowners talk about a home warranty, they are referring to a residential service contract.

Regardless of what you call it, a home service contract protects your budget by reducing the cost of repairs or replacements when appliances and systems in your home break down. American Home Shield and other top service providers offer multiple plans, service fees and add-ons so you can customize your home warranty cost and coverage level.

A residential service contract offers several benefits:

If you already have a residential service contract, you probably do not need to purchase an extended warranty for a new appliance. However, before declining that warranty, you may want to check the terms of your existing service contract to ensure that it will cover the item in question.

Remember that a residential service contract is the same as a home warranty, and most new appliances include a manufacturer's warranty at no additional cost.

Whether you need a residential service contract depends on your financial situation and your home's age. Consider how likely you are to file a claim during the coverage period and whether you have sufficient funds to cover an unexpected breakdown yourself. Purchasing a residential service contract makes sense if a few of your home's systems and appliances are nearing the end of their life spans. However, if you live in a new home, you might consider putting that money in a savings account instead.

Our team created a comprehensive rating system to rank providers based on objective factors. We researched each company by speaking with company representatives, reading sample contracts, and analyzing and comparing consumer reviews. We deepened our research by gaining homeowner insights through surveys and focus groups.

After collecting data, we scored each provider in the following categories: plan options, cost, trustworthiness, customer service, state availability, additional benefits and coverage specifics.

Kristin Peters is a content developer with over seven years of experience researching and writing about various consumer-focused topics. As part of the Guides Home Team, she focuses primarily on home warranties and insurance services that can bring homeowners peace of mind.

Veronika Jelenik is an editor with a background in journalism. She previously has had her work published in the New York Daily News and the Hartford Courant, and she has covered many disparate topics. Veronika has a bachelor's degree in journalism and social and cultural analysis. When not immersed in home services content, Veronika enjoys spending time with her friends and her Chihuahua, Beanie.