What’s Home Equity Protection?

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Home equity protection refers to a plan purchased by home buyers that helps offset any loss in value their home may suffer. For a small percentage of the original purchase price, the plan covers the homeowner when he intends to sell the home in the event that home prices in the area have declined. The company offering home equity protection would then pay the homeowner the original payment multiplied by the amount of percentage points that home prices in that particular area decreased. If home prices stay the same or go up, the homeowner loses their original protection payment.

Many investors view buying a home as one type of investment opportunity. If a home’s value increases, the owner will pocket a tidy profit when it’s time to sell the home. Unfortunately, the housing market is generally volatile, which means that prices in any given area are just as likely to go down as they are to go up, especially in a short period of time. For this reason, home buyers may consider equity protection as a way to protect their investment.

The typical home equity protection contract begins with a payment to the company offering the service, which usually amounts to a small percentage of the purchase price. For example, on a home valued at $200,000 US Dollars (USD), the required payment might be 1 percent of that amount or $2,000 USD. This amount becomes the basis for any future payments from the business to the homeowner.

Using this example, imagine the owner wants to sell the house after five years and it is determined that house prices in the area have dropped by 10%. This percentage is determined by specific housing market indices that measure house price values. The plan then pays the person who owns the plan $20,000 USD, which is 10 percent times the original $2,000 USD payment. It is important to note that this money would be owed to the plan holder even if the specific home in question sold for more than the original purchase price, since ratios are the determining factor in equity protection payments.

Of course, if home prices in the area stay the same or increase, the floor owner is owed nothing at the time of resale and forfeits the original payment. Since this is the case, home buyers should carefully inspect whether home equity protection is worth the risk. In general, security is a better idea if the owner plans to resell the home in a relatively short time. This is because home prices, while volatile over a short period, will usually rise as a typical 30-year mortgage comes to an end.

Smart Asset.

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