What is Home Equity Protection?

Jim B.

Home equity protection refers to a plan bought by home buyers that helps to offset any loss in value that their home may suffer. For a small percentage of the original purchase price, the plan covers the home owner when he plans to sell the house in the event that home prices in the area have fallen. The company that offers home equity protection would then pay the home owner the original payment back multiplied by the amount of percentage points that home prices in that particular area have decreased. If home prices stay the same or rise, the home owner loses out on the original protection payment.

Home equity protection helps to offset any loss in value that a person's home may suffer.
Home equity protection helps to offset any loss in value that a person's home may suffer.

Many investors consider buying a home a type of investment opportunity. If the value of a home rises, the owner will pocket a tidy profit when it's time to sell the house. Unfortunately, the real estate market is generally volatile, meaning that prices in a given area are just as likely to fall as they are to rise, especially in a short period of time. For that reason, home buyers may consider home equity protection as a way to protect their investment.

The typical home equity protection agreement begins with a payment to the company offering the service, which usually amounts to a tiny percentage of the purchase price. For example, on a home worth $200,000 US Dollars (USD), the required payment might amount to 1 percent of that amount, or $2,000 USD. This amount becomes the basis for any future payouts by the company to the home owner.

Using this example, imagine that the owner wishes to sell the house after five years time, and it is determined that home prices in the area have fallen by 10 percent. This percentage is determined by specific real estate market indexes that measure home price values. The plan then pays the person owning the plan $20,000 USD, which is 10 percent multiplied by the $2,000 USD original payment. It is important to note that this money would be owed to the plan holder even if the specific home in question is sold at a higher price than the original purchase price, as the indexes are the determining factor in home equity protection payments.

Of course, should home prices in the area stay the same or increase, the owner of the plan is owed nothing upon resale and loses the original payment. As this is the case, home buyers should closely inspect whether home equity protection is worth the risk. Generally speaking, protection is a better idea if the owner plans to resell the house in a relatively short time. This is because home prices, while volatile in a short period, will usually have increased by the conclusion of a typical 30-year mortgage.

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