A home warranty is a service contract that covers the replacement or repair costs of mechanical systems and household appliances. Do not confuse this with homeowners insurance, as they are quite different from each other.

A home insurance policy provides coverage for accidental damage to your house structure due to natural hazards or robbery. A home warranty plan, on the other hand, covers the repair costs of home appliances and equipment that fail to work properly due to wear and tear.

Mortgage lenders require you to obtain homeowners insurance, which covers extensive structural damage to your home. However, your policy may not extend coverage to certain systems and appliances that you have installed in your home. This is where a home warranty comes in.

Even though home warranties are optional and apply to systems and appliances that have sustained wear and tear over time, you should consider getting one.

How Does a Home Warranty Work?

When your mechanical system or household appliance begins to give you trouble, you can rely on your home warranty to resolve the issue and get them back to working order. Here is what you need to do when your mechanical systems or household appliances malfunction:

• Contact the home warranty company
• The company will send a contractor to your home to check on the issue
• Pay the contractor a service fee
• The contractor will inspect the mechanical system or household appliance to diagnose the problem and inform the warranty company so they can approve the service
• The company will then pay the contractor for fixing your broken mechanical system or household appliance

Whatever you do, please do not attempt any DIY repairs or hire any non-approved contractors because most warranty providing companies will not reimburse you for doing so.

When you contact the warranty provider, they will first determine whether or not your mechanical system or household appliance is covered under the home warranty policy. Next, they will send an approved contractor to your home.

After you pay the contractor a service fee for coming, they will look at your mechanical system or broken appliance and then they will proceed to get your request for repairs approved by the company. In most cases, the company will pay the contractor the remaining balance.

The only downside to this is that the approval process for repairs is slow and payments need to pass through a lot of people. Moreover, there are times when repairs and replacements take a while and if you had paid out of your own pocket, it would have been quicker. This is because the contractor sent by the company to your house is not their employee. If any repairs need to be made, they need to be approved beforehand.

Should You Obtain Home Warranty?

When important systems or costly appliances malfunction unexpectedly, a home warranty can come in handy, as it helps you get them repaired and/or replaced. If you are new homeowner or a potential buyer, you should consider obtaining a home warranty, especially if money is tight.

You can perform an informal cost-benefit analysis to understand if paying a yearly premium is reasonable or not.