Home Value Protection: Worth the Risk?

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There’s a new market developing that guarantees your home value won’t drop — otherwise known as home equity protection. It can be expensive, but it can also help stabilize the value of your home, especially when it’s time to sell. Here’s how home equity protection works, and how to get it.

First the bad news. Home prices in the past few years have been on a steady descent. In 2005, U.S. average home values were up 12%. So far in 2009, the average value of a U.S. home was down 13%. In between, house values have fallen as much as 30% and even 40% in hard-hit areas like California, Arizona and Florida.

If that kind of roller coaster ride isn’t for you, a home equity protection plan can help. Essentially insurance policies (although technically, they’re not considered insurance) against the potential declining value of your house, home equity protection plans basically guarantee against any further losses — that is, beyond the losses you’ve suffered before you buy the policy.

Cost-wise, home equity protection plans are priced at approximately 1% to 3% of your home’s current equity at the time you apply for the policy.

The home equity protection company makes it fairly easy to figure out if you’ve got a policy payment coming or not. Analysts at these companies will average out all the homes in your zip code, and if you go to sell your home, the “insurer” will calculate any loss incurred since you purchased the policy. Then it will cut you a check for the difference, minus a 10% deductible. Note that if home prices rise, you won’t be getting any checks, and you’ll be out the money you put down for the policy in the first place.

Two companies — Austin, Tex.-based EquityLock Financial and Charlotte, N.C.-based Lighthouse Group — seem to be making the most noise in the home equity protection market.

Should you opt in and buy a home equity protection plan? If you plan on living in your home for five years or less, it might be a good idea. That’s because, over the short-term, home prices are much more volatile on average. And one of those volatile swings could cost you tens of thousands of dollars, much like the cycle the U.S. housing market has gone through in recent years.

But in the long haul, say 10 years or more, home prices really don’t fluctuate all that much. Your chances of losing a lot of money on your home over a 10- or 15-year period are actually pretty low.

Consider the amount you’re paying in protection plan costs versus the possible payout if there’s another steep decline in home values. If, for example, you own a home that’s currently valued at $300,000, and you buy an equity protection plan policy for $6,000 (or 2% of your homes value) the one certainty is that you’re out $6,000. The greater unknown is if you’ll ever collect on the policy. There’s really no way to know for sure.

Also, watch for lock-out periods. These are times, usually at the front end of a policy timetable, where you can’t collect even if your home suffers a serious decline in value. Check with your equity protection company first to see what their lockout rules are, and how they could impact you.

Predicting home equity values is, at best, an inexact science. But if it helps you sleep better at night, a home equity protection plan could be worth the cost.

Better yet, it could be your only buffer against a continuing decline in U.S. home values. And nobody is betting against that right now.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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