Should You Buy a Home Equity Protection Plan?

EquityLock Financial, based in Austin, Texas, is selling a product promising to put a little more control in homeowners’ hands. Their pitch? That homeowners could spend a little now to hedge against declines in the value of their home later. Here's how it works: 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. The contract, which should not be confused with an insurance policy, pays the homeowner when he sells his home in a market where average home prices have dropped since their purchase. The amount he receives is tied to the size of the market’s decline, as measured by one of two home price indexes. Say you buy a home in Denver for $300,000. Five years later, after Denver's home price index falls 10%, you sell it for $290,000. At closing, the company you bought the equity protection from pays you $30,000 – your original purchase price times 10%. Even if you sold your home for more than what you paid to buy it, you can still make the claim – as long as the index fell.

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