Find out how home warranties are different from insurance, and if you should have one.

As a first-time homebuyer, you’re certain to get hit with a lot of jargon right off the bat: appraisal, escrow, closing costs, prepayment penalties. Once you get deeper into the home-buying process, the mention of a home warranty will probably come up — and you should take note of what’s being said.

Like warranties for a computer or a car, home warranties cover repairs to certain items in your home for a predetermined time. Sounds like what homeowners insurance is for, right? Not exactly.

Insurance covers damage to the interior and exterior of your home as well as personal property in the home in the case of certain weather-related damage, theft, and fires. In other words, it’s important to always, always have home insurance. Without it, you could be forced to shell out big bucks if misfortune strikes.

Home warranties, on the other hand, cover the repair of major appliances, such as air-conditioning units, refrigerators, stoves, garbage disposals, and even pools. If any items covered under your warranty stop working, the service contractor with whom you have a warranty will repair or replace the broken item.

So are home warranties worth it?

Typically, new homes have a builder’s warranty, covering certain appliances and other components of the home for a specified time. Since home warranties cost only a couple of hundred dollars each year (plus service charges, if indeed the covered items do break), they’re usually worth it in new homes.

If something was installed incorrectly (think: faulty wiring with your electricity) or you end up with a lemon of a refrigerator, you’ll be covered. You simply call the builder providing your home warranty coverage, and they will send someone to service or replace the item. Most home warranties will charge a service fee for repairs or replacements, but the cost of the item or repair parts does not fall on you as a homeowner.

How does a home warranty work?

Home warranties for existing homes are not as black-and-white. Sometimes a seller will offer a warranty as part of the closing negotiations. In that case, the warranty won’t cost you out of pocket, so it’s a nice perk. But when purchasing your own warranty for an existing home, a few factors come into play.

Most home warranties include clauses that state components of the home are covered only if they have been properly maintained over the years. In some cases, the home you are buying may be relatively new or have many new appliances, so investing in a warranty is the smart way to go. But for homes with a 16-year-old AC unit and a stove straight out of the ’70s, you may want to think twice, especially if you don’t have documents to prove they’ve been maintained.

Are you considering a home warranty? Have you ever used one? Share in the comments below!