Home Equity Protection Plans

Like many people, watching a precipitous drop in your homes value can make even the most secure financial homeowner uncomfortable. The real estate market is a long way from finding the bottom, and where there is discord with regard to finances there is always someone there to capitalize on the fear.

EquityLock Financial, located in  Austin, Texas, and Lighthouse Group based in Charlotte, N.C. are selling products promising to put a little more control in homeowners’ hands. Essentially these firms are offering protection against declines in the value of your home. Here is the deal.

For a fee of 1% to 3% of their home’s value, homeowners buy a contract that protects them against the loss of equity in their home if the market takes a turn for the worse.

Not to be confused with an insurance policy the contract is triggers at the sale of your home and only if your home equity has declined. Say you live in Florida and buy a home for $300,000. Some 4 or 5 years later the bottom falls out of the market and you sell your home for $290,000.00. The amount the homeowner receives is tied to the size of the market’s decline, as measured by one of two home price indexes (both of which are based on sales of single-family homes). If the decline is 10% the homeowner would receive at he closing of their sale, the company you bought the equity protection from pays you $30,000 – your original purchase price times 10%.

The most obvious question you should ask yourself is how long you plan to stay in your home. 2% of a $300,000.00 home is $6000.00. The firms offering these plans obviously hope you stay in your home long term. So although not an insurance policy , the company is betting there money on home appreciation and the homeowner is wagering on depreciation of his or her home.

For those who may think they can capitalize on the terms of the contract quickly sure to ask about any lockout period which bars you from collecting payment before a set time. Most companies will impose an exclusion term ranging from 18 to 30 months from the time the protection is purchased. So you can’t sell your home and make a claim a year after the contract begins.

Is it worth a look? Certainly for many the anxiety of investing their hard earned money it will be. For the time being it might be worthwhile to let this type of coverage run its course for while. The novelty of such programs is what fuels the customer base in the beginning and you don’t want to be part of the novelty.