What Is Home Equity Protection?

If you are worried about the value of your home declining, you might want to consider buying home equity protection. Home equity protection is a relatively new product that was designed to help people cover their losses if the price of their home falls. The product was developed by a group of Yale professors in conjunction with a leading company in the housing industry. If there is some risk of declining home prices in your area, this might be a product that can help. Here are a few things to consider about home equity protection.

What it Does

Home equity protection is designed to pay you for the declining value of your house when you sell. In order to be paid, you have to actually sell the home. They are not going to just pay you for the value of the house depreciating. You have to actually realize the loss before the company will pay you anything. Therefore, this protection is basically just there in case you decide that you have to sell while the home values in your area are down. You will not be tied to the house based on declining home prices in the area.

What Determines Value?

If you are considering buying home equity protection, you might be wondering how they determine the decline in value. When you buy this particular type of coverage, they will disclose to you what the home values are tied to. Most of the time, a housing index will determine if prices are declining. They will let you know ahead of time which housing index that your program will be attached to. 

Many people think that whether or not they lose money on the sale of their house has something to do with the program. This is not accurate. The value of the home is determined by the index and the zip code in which the house resides. If you lose money on the sale of your home, that is really irrelevant. This protection is a general tool to help based on index prices only. You could theoretically lose or make money on the sale of your house even with this protection. However, you will usually not be far off from where you need to be as long as you have home equity protection in place. 

Costs

In order to get this type of protection, there will be some costs involved. While it does cost something, the price is usually very reasonable. In fact, this coverage has been such a good deal that many speculators have purchased it in areas that they believe home values will decrease just so that they can profit. 

A typical fee is 1.5% of the value of the home. Some companies will request this amount in a one-time fee upfront. Others will allow you to finance this amount with low interest over a period of two to four years. This will allow you to make a small monthly payment and still protect the value of your house. 

 

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