What Is a Residential Service Contract?

By Jesus Sanchez Garcia | December 19, 2023

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A residential service contract is an agreement between a homeowner and a service provider that covers certain home systems and major appliances. In exchange for a monthly or annual premium, the service provider covers the repair and replacement costs for items listed in the policy. This type of contract is better known as a home warranty.

Many homeowners have questions about how residential service contracts work and whether they are a smart investment. After researching and comparing the best home warranties on the market, we have the answers. Below is our comprehensive guide to residential service contracts.


 

How Does a Residential Service Contract Work?

With a residential service contract, you do not have to handle unexpected home system or appliance breakdowns on your own. If a covered item malfunctions or breaks down during the coverage period—typically lasting one year, with the option to renew—you can report the problem to your home warranty company.

Once you have filed a claim, the company will arrange a service call with a qualified technician. Some companies allow you to choose your technician and schedule the appointment yourself. The technician will diagnose the problem and propose a solution, which could range from a simple repair to a full replacement, depending on the issue.

In addition to a monthly premium, you will only be responsible for paying a flat service call fee if the claim is approved and the cost does not exceed your coverage limits. The home warranty company will cover the remaining balance. Sometimes, the company will reimburse you rather than pay the costs up-front.


 

What Does a Residential Service Contract Cover?

Most home warranty companies offer multiple plans for homeowners to choose from. Often, these are categorized as systems coverage, appliance coverage, or total coverage. Below are examples of what a residential service contract covers.


 

What Doesn’t a Residential Service Contract Cover?

Residential service contracts generally cover normal wear and tear for your home’s major appliances and systems. The exact terms, including any coverage limits and exclusions, will vary depending on the company and policy you choose. However, home warranties commonly exclude the following:

Although the exclusions above are common, they are not universal. Some companies offer more generous terms than others


 

Do I Need a Residential Service Contract?

Not everyone needs a residential service contract. Living in a newly constructed home makes you less likely to benefit from a home warranty. If your home is older but has brand-new appliances, they may still be covered by their manufacturer’s warranties. In that case, you could opt for systems coverage rather than home appliance or comprehensive coverage.

Residential service agreements are most useful if you live in an older home with aging systems and appliances that are likely to break down soon. They can also provide peace of mind when purchasing a home. Home service contracts are often purchased during real estate transactions at the recommendation of realtors. If you are selling your home, you may purchase a home warranty to incentivize and reassure home buyers.


 

How Much Do Residential Service Contracts Cost?

In general, you can expect a home warranty to cost around $50 per month or $500 per year, with service fees running from $60 to $125. The exact cost will depend on the company and coverage you select as well as the size and location of your home.

To offer specific examples, we requested quotes from three companies for a 2,000-square-foot, single-family home in Richmond, Virginia.

American Home Shield

American Home Shield (AHS) lets customers choose a $75, $100, or $125 service call fee. The higher your service fee, the lower your monthly premium. The table below shows quotes from AHS for its three plans.

PlanCoverageMonthly Cost

ShieldSilver

Systems only

$25.82–$45.82

ShieldGold

Systems and appliances

$45.82–$65.82

ShieldPlatinum

Systems, appliances, and additional coverage

$75.82–$95.82

Get a Quick Quote: Visit site
Read more: American Home Shield Review


 

Select Home Warranty

Select Home Warranty typically charges a $75 service call fee. Here are some sample quotes from Select for its three plans.

PlanCoverageMonthly CostAnnual Cost

Bronze Care

Appliances only

$44.42

$479.99

Gold Care

Systems Only

$44.42

$479.99

Platinum Care

Systems and appliances

$47.75

$524.99

Get a Quick Quote: Visit site
Read more: Select Home Warranty Review


 

Liberty Home Guard

Liberty Home Guard (LHG) lists a service call fee of $90 in a sample contract on its website. However, your fee could be higher or lower than this—a representative told us it will be between $65 and $125. The table below lists quotes for each of LHG’s plans.

PlanCoverageMonthly Cost

Appliance Guard

Appliances only

$49.99

Systems Guard

Systems only

$54.99

Total Home Guard

Systems and appliances

$59.99

Get a Quick Quote: Visit site
Read more: Liberty Home Guard Review


 

How to Choose a Residential Service Contract Provider

Before choosing a home warranty plan, gather quotes from at least three different service providers. Then do a side-by-side comparison of each company’s premiums, service fees, and coverage.

Most companies make it easy to get an instant quote online and even post a sample home warranty contract on their website. You can use the sample contracts to compare coverage limits, exclusions, and other terms that affect the value of the warranty.

If you need coverage for high-end appliances, check the coverage caps for those items. Otherwise, you may learn too late that your warranty will not cover the full replacement costs for your top-of-the-line kitchen appliances.


 

What to Look For in a Residential Service Contract

The best way to vet home warranty providers is to contact the office that handles insurance or home warranty licensing in your state. You can also check the company’s profile on Better Business Bureau (BBB) website and browse customer reviews on other review sites, such as Yelp and Trustpilot.

As you gather quotes, research companies, and review contracts, watch for the following red flags:


 

Our Recommendation

A residential service contract can be a valuable supplement to your homeowners insurance policy. While the latter covers natural disasters, accidents, vandalism, and theft, a good home warranty will cover unexpected breakdowns from normal wear and tear. Your service provider will also provide access to a network of qualified, pre-screened technicians who will service, repair, or replace key components of your home.

A home warranty may be an especially good investment if you are buying or selling a home. It can provide peace of mind as buyers wrestle with the uncertainties, questions, and misgivings that accompany real estate transactions.


 

Residential Service Contract FAQ

What is the difference between a service contract and a warranty?

Although service contracts are often referred to as warranties, these two terms are not technically synonymous. A home warranty, or builder’s warranty, is typically provided by the builder and factored into the price of the home. Service contracts are sold by third-party companies and may be purchased by the homeowner at any time. Service contracts are commonly referred to as home warranties. In this case, there is no difference between them.

What are the benefits of service contracts?

Service contracts offer the following benefits:Network of pre-screened techniciansConveniencePeace of mindLower repair and replacement costs

What is an example of a service contract in real estate?

Home warranties are the most common example of a service contract in real estate. A home warranty is actually a residential service contract that covers service, repair, and replacement for certain home systems and major appliances.

Can you cancel service contracts?

You can cancel service contracts, and the contract itself should spell out the terms and process for cancellation. The service provider may require written notice. Early termination may result in a cancellation fee or a prorated refund.


 

How We Chose the Top Home Warranty Providers

Our team reviewed and researched dozens of home warranty providers, thoroughly analyzed sample agreements, and identified customer pain points based on analysis of customer reviews and interviews with industry experts. Our in-depth methodology guides our review process to provide transparent information about the companies we review.

During this process, we determined that the most critical aspects of a home warranty company include available service plans and add-ons, depth of coverage, plan cost, industry reputation, customer support infrastructure, and additional features. We also focused on the ability to choose your own contractor, upgrade your coverage package, transfer your plan to another owner, and cover roof leaks, high-end appliance brands, ceiling and exhaust fans, and faucets and fixtures.

Our research supported that plan coverage should carry the most weight, with customer support as the second-most important factor. Industry reputation, plan availability, and additional features were rated equally. We determined that price range, while worth considering, should not be the primary basis for choosing a home warranty provider for your home’s needs.