That’s why buyers may see the appeal in a new product from Dallas-based startup ValueInsured: +Plus, down payment insurance for homeowners. In a nutshell: It offers protection where protection didn’t previously exist.
However, the jury is still out on whether it’s a smart (additional) investment or the equivalent of feeding cash directly into the septic system.
It works like this: New homeowners can insure down payments of up to 20% for up to $200,000, paying a one-time premium when they close. Costs depend on how much they’re insuring and what state they’re in.
Then if home prices have fallen and these still relatively new homeowners have to move—say for a new job or to a bigger place after having triplets—ValueInsured will make sure they’re not out the difference.
Customers in all 50 states and Washington, DC, can get the insurance directly through the company or when they secure a mortgage through Amalgamated Bank. Buyers can also have their premiums included in their Amalgamated mortgages using a lender credit to pay the premium.
For example, a buyer who insures a 10% down payment of $25,000 on a $250,000 home in Ohio would pay a one-time fee of $1,455.52, according to ValueInsured’s website. If the buyer insured a 20% deposit of $50,000, it would cost $1,837.50. The costs of premiums vary by state.
“Nobody knows where life is going to take them,” says Joe Melendez, CEO of ValueInsured. “It’s about empowering a home buyer to purchase a home knowing that the money they’re putting into that home is insured in the event that they need to move and the value of their home is down.”
But if it sounds too good to be true… The insurance product, launched in the fall, comes with a few significant limitations. Homeowners have to wait two years before they can file a claim. And it’s good for up to only seven years after the day they closed. Seven years and one day? You’re out of luck.
The home must be a primary residence—the owners can’t be renting it out. And you won’t get your money back if you’re foreclosed upon (yikes) or if your home is seized under eminent domain (double yikes). Don’t even think about selling to a family member, either.
And again, this is down payment insurance—the policy doesn’t cover any upgrades you make, or costs related to the purchase or sale of the home.
The biggest catch: Home values are measured by a federal housing index for each state instead of how much the price for an individual residence declined. Those who buy the insurance will only receive a check for whatever is less: their down payment, their lost equity, or the drop in the index.
Here’s the problem: Take the example above, where you lose $20,000 (6.7%) on the home sale. If your state’s index doesn’t show a loss, then you won’t get a cent. Or in another scenario, say you lose that same $20,000 on the sale, but the state index is only down 3%. According to the state calculation, your home has lost only $9,000 in value, and that’s the amount that you’d get back.
“There’s just a lot of red flags here for me,” says Bob Hunter, director of insurance at the Consumer Federation of America, a Washington, DC–based, national coalition of about 350 pro-consumer groups. He is familiar with +Plus, although he has not specifically looked at a policy.
“I warn people not to buy new products, because they’re usually higher-priced,” says Hunter, a former Texas insurance commissioner. That’s because insurers don’t know on new products how much they’ll wind up reimbursing customers. And “they typically put in a lot of exclusions and other limitations to hold down their possible payouts.”
Hunter also worries that the five-year period in which homeowners can submit claims is too limited.
Protecting one’s down payment may indeed appeal to those living in turbulent real estate markets that got walloped when the housing bubble burst, says Michael Barry, a spokesman at the Insurance Information Institute, an industry-funded educational organization in New York.
Here’s the problem: Take the example above, where you lose $20,000 (6.7%) on the home sale. If your state’s index doesn’t show a loss, then you won’t get a cent. Or in another scenario, say you lose that same $20,000 on the sale, but the state index is only down 3%. According to the state calculation, your home has lost only $9,000 in value, and that’s the amount that you’d get back.
“There’s just a lot of red flags here for me,” says Bob Hunter, director of insurance at the Consumer Federation of America, a Washington, DC–based, national coalition of about 350 pro-consumer groups. He is familiar with +Plus, although he has not specifically looked at a policy.
“I warn people not to buy new products, because they’re usually higher-priced,” says Hunter, a former Texas insurance commissioner. That’s because insurers don’t know on new products how much they’ll wind up reimbursing customers. And “they typically put in a lot of exclusions and other limitations to hold down their possible payouts.”
Hunter also worries that the five-year period in which homeowners can submit claims is too limited.
Protecting one’s down payment may indeed appeal to those living in turbulent real estate markets that got walloped when the housing bubble burst, says Michael Barry, a spokesman at the Insurance Information Institute, an industry-funded educational organization in New York.
“[But] I’d be reluctant to cut another check at closing,” he says. “This is just one more additional expense.”
Despite the caveats, the concept of down payment insurance is alluring to real estate agents such as Deb Counts-Tabor.
Bidding wars have become common in the white-hot Portland, OR, market where she works, and desperate buyers, rattled by the limited number of homes for sale, will often pay well over the list price.
“People are going $10,000, $20,000, $30,000 over the asking price and waiving their appraisals because they want the house,” says Counts-Tabor, of Oregon Realty. But “if the market adjusts before they can pay that down, they end up underwater.”
It might make sense for buyers who worry they may have overpaid, she says.
Denver real estate agent Kristal Kraft would agree. Two of the properties she recently represented sold for nearly $30,000 more than their list prices as Denver’s market becomes increasingly competitive.
“It would give buyers peace of mind,” says Kraft, of the Berkshire Group. “They can be assured they can get some of their money back.”
Source: Realtor.com, Clare Trapasso
http://www.realtor.com/news/trends/down-payment-insurance/?iid=rdc_news_hp_carousel_theLatest
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