Understaning Home Equity Protection

Home equity protection was developed to help homeowners protect themselves from falling real estate prices. It is still a relatively new program that many homeowners are unaware of. It can be purchased from several different providers and it is specific to each area in the country. If you are considering purchasing home equity protection for your home, there are a few things that you need to understand.

Pros

  • Protects you from falling prices- Owning real estate can be a risky proposition. If you own real estate and your area goes through an economic downturn, it could mean that the value of your home would decrease. When the value decreases, it could put you upside-down on your loan. This means that you cannot refinance or sell your home unless you want to pay money out of pocket to cover the original balance. This can tie the hands of many homeowners and force them to wait out the downturn. 
  • Reasonable pricing- Most of the time, the price to get involved in a program like this is very affordable. In most cases, you can purchase the program for around 1.5% of the value of the home that you are insuring. While this might seem like a lot of money in one lump sum, they will often allow you to finance this over a period of a few years. You can pay just a few dollars per month and it will be enough to protect your home from negative price movement. 
  • Benefit from falling prices- Many investors have used this type of protection as a type of speculative investment. You could potentially purchase this type of protection on homes in areas that you expect price will fall. When the prices fall like expected, you can sell the homes and reap the benefits of the protection. 

Cons

  • Based on zip codes- The way that they determine whether or not your house has lost value is based on the zip code in which you live. Therefore, it is not on a case by case basis. You could have this type of protection and potentially still lose money on the sale of your home. 
  • Only pays when you sell- If you do not plan on selling your home, then you will not be able to benefit from this type of protection. For example, many people like to refinance their homes at some point. If the value of your home has fallen, then you may not be able to get enough from the refinance to cover the existing loan. Home equity protection has nothing to guard against this. 

The Verdict

Home equity protection can be a very beneficial program if you use it correctly. It will not pay for your home value loss on a case-by-case basis, but it will keep you from losing too much money based on the area's home values. If you fear that the value of homes in your area might decrease, then this type of protection can be a great idea. 

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