By David Pilley on June 17, 2011
.jpg.aspx?width=75&height=75) Well, it’s not the end of the world, so it’s time to talk about another financial topic. The home you live in is more than physical protection for you and your family. It is a financial investment, the biggest one you might ever make, and it’s also probably the biggest asset you have. In the long run, the market value of your home will increase, meaning you will gain equity. At a certain point, you could consider turning the equity in actual cash with a HELOC or you could sell the house to gain in your investment.
At the present, though, the housing market is not strong. There have been thousands of foreclosures across the country in the past three years, and property values are dropping. As a result, few people are earning equity, and some people are ending up having a piece of property with less value now than when it was purchased. If you find yourself in this situation and you have the funds, you might want to consider home equity protection.
Home equity protection is also known as home equity insurance, but it is not linked with any insurance company. The idea started back in 2002 by a non-profit initiative in Syracuse, NY. The Syracuse Neighborhood Initiative allowed homeowners to purchase protection for a one-time fee at 1.5% of the home’s value. The program was so successful that other major municipalities developed similar programs to encourage home ownership. In financial lingo, this type of protection is called a “hedge,” an investment position made in an attempt to offset any possible losses.
There are programs across the country that offer home equity protection, but like anything you purchase, you must decide if you really need it. While most home values are declining, this is not the case in every neighborhood across the country. Some programs offering home equity protection require that you “lock in” to your contract, meaning you must stay in your home for a specific amount of time (typically between one and three years) before selling it. Some programs offer a one-time payment, while others offer a monthly payment plan for up to a couple of years. In total, you may be paying an amount between 1% and 3% of your home’s value. Keep in mind that you also made a down payment on the home, and you have other things to spend money on, too. You should purchase home equity protection only if you have the funds, as the credit bubble will continue to swell if you can’t afford it.
If you purchase home equity protection, you may be able to prevent incurring financial loss from the purchasing and selling of your home. Things like the economy and the housing market are not exact sciences and are based partly on estimates and feeling. Home prices are dropping right now, but that doesn’t mean they will always drop. Vice versa, when home prices go back up, that doesn’t mean they will continually rise. Chances are you might not need home equity protection, so consider it only if you aren’t comfortable with taking a loss in your investment.
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