Home equity protection is a plan that covers homeowners in case of a loss in home value when selling. The plan pays the original payment multiplied by the percentage of the decrease in home prices. It is worth considering for short-term investments, but if home prices stay the same or increase, the owner loses the original payment.
Home equity protection refers to a plan purchased by homebuyers that helps offset any loss in value your home may experience. For a small percentage of the original purchase price, the plan covers the homeowner when he plans to sell the home in the event that home prices in the area have fallen. The company offering home equity protection would pay the homeowner the original payment multiplied by the number of percentage points that home prices in that particular area have decreased. If home prices stay the same or increase, the owner loses the original protection payment.
Many investors view buying a home as a type of investment opportunity. If the value of a house increases, the owner will make a nice profit when it comes time to sell the house. Unfortunately, the real estate market is generally volatile, which means that prices in a given area are just as likely to fall as they are to rise, especially over a short period of time. For that reason, homebuyers 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, usually a small percentage of the purchase price. For example, on a home with a value of $200,000 United States dollars (USD), the required down payment could be 1 percent of that amount, or $2,000 USD. This amount becomes the basis for any future payments by the company to the homeowner.
Using this example, imagine that the owner wants to sell the house after five years, and it is determined that home prices in the area have fallen by 10 percent. This percentage is determined by specific housing market indices that measure home price values. The plan then pays the person who owns the plan $20,000 USD, which is 10 percent multiplied by the original payment of $2,000 USD. It is important to note that this money is owed to the plan holder, even if the specific home in question sells for a higher price than the original purchase price, as indexes are the determining factor in protection payments. of the value of the home.
Of course, if home prices in the area stay the same or increase, the owner of the plan is owed nothing when reselling it and loses the original payment. As this is the case, home buyers should closely inspect whether home value 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 over a short period, will generally have risen by the end of a typical 30-year mortgage.
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