The purchase of a home represents a substantial investment. Unfortunately, like many other investments, its value is contingent on outside factors. Your home’s value is directly affected by the health of the housing market. If you need to sell during a downturn, you could see your home go for a much lower price than you paid.
To help safeguard your investment, Home Equity Protection takes the value of your home at the start of your policy and, when it comes time to sell, will cover the difference if market factors cause your home to lose value.
Why do I need protection?
In recent history, the housing market has taken a significant hit, with no guarantee that the worst is over. While the market goes up and down naturally, you may not always have the option to wait for improved market conditions before selling. In situations like this, a down market can translate to a significant loss on the sale of your home.
You can’t predict what the condition of the housing market will be when it comes time for you to sell. However, with Home Equity Protection you can make sure your investment will hold its value even if you have to sell during the worst of times.
How it works
Home Equity Protection takes the current value of your house at the time when your policy starts and establishes it as the protected value. When you sell your house, if market factors cause its value to decline you are eligible to file a claim under your Home Equity Protection coverage.
While Home Equity Protection can provide peace of mind to any homeowner worried about ever-changing market conditions, it is especially helpful for those who foresee the possibility for a move in the near future.
When filing a claim two requirements commonly apply:
- Your home must sell for less than its protected value
- The average market value of local homes must have declined as reported by an independent home price index
The final amount that you can recoup from a Home Equity Protection claim is based on the difference between the protected value of your home and the percentage that the local home price index has declined.
For example, you insure your home today, establishing the protected value at $300,000. Down the road when it comes time to sell, the home price index shows that average home values in your area have dropped by 15 percent. This would lower the expected value of your home by $45,000. If you then sold your home for $255,000, consistent with the 15 percent decrease in value, your policy would pay out, covering the difference of $45,000.
Home Equity Protection coverage is meant to guard against market value fluctuations only, which is why independent market analysis is a necessary part of the claims process. The insurance does not cover loss of value resulting from anything other than current market conditions.
Policies may have some exceptions that you need to be aware of. Commonly, a drop in market value due to acts of war or terrorism or localized disasters such as flooding, hurricanes or earthquake or may be excluded as triggers for claims against the policy. As always, it is important to review your policy with your broker to make sure you are getting the coverage that you need.
The Big Picture
Your home is one of the biggest investments you’ll ever make. Learn how you can protect its value no matter what shape the housing market is in.
Call ERM Insurance brokers at (949) 222-0444 to learn more about Home Equity Protection.