When you put down thousands of dollars to purchase a home, you’re taking a potentially serious financial risk: You could lose some or all of that money if the value of the house declines or a job transfer, illness or other life event forces you to sell the property during a dip in market demand.
But would you be willing to pay an insurer a one-time premium to protect your down payment against loss? There’s never been such an option — so you can’t be sure. But beginning next January that’s likely to change with the projected nationwide rollout of something called “+Plus by ValueInsured.”
The basic idea is straightforward. For an upfront premium that under some circumstances could be part of the interest rate you pay on your mortgage, your down payment — up to $200,000 — would be insured, with you as the beneficiary. If the value of your house declines and you sell at a loss, you’d be eligible to make a claim for up to the full amount of your original down payment.
The premiums are expected to average around $1,200 on a $20,000, 10 percent down payment on a $200,000 house. If you purchase the coverage as part of a lender credit toward closing expenses, rather than paying cash for the coverage at closing, the +Plus premium could be rolled into the interest rate on the entire loan, raising the rate slightly. It could also be a supplement to lender-paid mortgage insurance, with a higher rate on your mortgage.
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As with all insurance products, you’ve got to look hard at the details, especially the terms governing when and how much you’ll receive if you make a claim for a loss.
Sounds intriguing, right? But as with all insurance products, you’ve got to look hard at the details, especially the terms governing when and how much you’ll receive if you make a claim for a loss. The sponsor of the plan is a company in Dallas, ValueInsured (www.valueinsured.com). For the +Plus program, ValueInsured is partnering with Texas-based specialty insurer Houston International Insurance Group, and Everest Re Group Ltd., a reinsurance company headquartered in Bermuda.
Joe Melendez, founder and CEO of ValueInsured, told me that the goal of +Plus is “to take the risk element off the table and give [buyers] more confidence.”
So how much risk is really taken off the table? Start with the conditions that have to be met to qualify for a payment on a claim. Simply documenting that you suffered a loss after a sale won’t necessarily get you your down payment money back. You can’t file a claim during the first two years after your purchase or after seven years.
Next comes the really tricky part. The +Plus plan keys its payouts in part to a property value index published by the Federal Housing Finance Agency (www.fhfa.gov/DataTools/Tools/Pages/HPI-Calculator.aspx). If your state index hasn’t dropped during the period of your ownership but the sale price of your house has gone down, or if the FHFA index hasn’t declined as much as your home’s value since the date of purchase, you’re not likely to get all of your money back. Or maybe anything at all.
Here’s an example provided by ValueInsured: You put down $20,000 down on a $100,000 house. Five years later you sell at a loss of 20 percent, $20,000. If your state home price index as measured by the FHFA has declined by only 10 percent, the most you can obtain on a claim is $10,000. If your house declined in sales price by 30 percent but the FHFA index remained flat, you’d get zero on your loss. But if the index declined by 30 percent and your home price also declined by 20 percent, you could claim your full $20,000 back.
The payout formula is this: +Plus will pay the lesser of: (1) your original down payment, (2) the actual equity you lost, or (3) the purchase price or your house times the reduction in your state’s FHFA index.
Not so simple. For this sort of down payment insurance to provide you maximum coverage, your house essentially cannot be losing value faster than the statewide average, which of course, may not show any decline at all.
Good deal or not? It might make sense for you if unexpected economic reverses depress property values in your state. It might make sense as peace-of-mind coverage. But do the math and figure the likelihood that the premium you pay — which could raise your interest rate for long beyond the point where your coverage expires if it’s included in your mortgage rate — is worth the coverage you’ll receive.
Kenneth Harney is executive director of the National Real Estate Development Center.