Making a down payment on a house could be your biggest investment you make. Now there is a way to protect that investment.
Private Mortgage Insurance (PMI) is a method of protecting lenders from risk if you put down a lower down payment on a home (typically less than 20%). The PMI principle assumes that since you have less of an investment in the home, it is easier for you to bail out and/or default on your loan and leave the lender holding the bag. PMI applies through the early portions of your mortgage, and once you have enough equity built up in your home, you can ask to have PMI removed.
What about insurance that covers your down payment from an investment perspective? If you bought your home and had to sell for some reason within a few years of purchase, and the value of your home decreased through an overall drop in the market, you could be selling at a loss. PMI does not exist to help you recoup any of your down payment investment.
ValueInsured has established a new form of down payment insurance to handle just such an issue for down payment amounts up to $200,000. The +Plus program offers insurance to new homeowners that will pay back some or all of your down payment if you have to sell your home at a loss anytime between two to seven years of the purchase date. This timeframe focuses on those who are looking to settle down in a long-term home but are forced to move as their life plans change. It also prevents house flippers from taking advantage of the program and driving up premiums for all participants.
Premiums will be determined by the amount of the down payment and various aspects of the local housing market. ValueInsured gives the example of an average $200,000 home with a $20,000 down payment, resulting in an average down payment insurance cost of approximately $1,000. The payment can be incorporated into your monthly mortgage payment through a lender credit.
Aside from the two- to seven-year time limit, there are a few other restrictions. You must occupy the home during the entire period (no rental homes), and the sale must be to an unrelated third party. No leasebacks are allowed.
The amount paid to the insured, if any, is determined by the actual sale price and through general market values determined using the FHFA Home Price Index (HPI). If both the sale price and the HPI fell by 20% or more, your full down payment will be refunded. If either the HPI has not decreased at all or you sold the home for more than the price you paid, you do not receive any payback. (This prevents people from intentionally selling at an unusually high loss when the overall market does not show a loss.)
Partial payments are made when both the HPI falls by an amount less than 20% and your home sells at a loss of less than 20%. Payments are the lesser of your down payment, your actual equity lost (price difference), or the purchase price of your home multiplied by the drop in your area’s HPI.
Would down payment insurance work for you? Only you can answer that question, since all insurance involves cost versus personal risk tolerance. Generally, down payment insurance should be more attractive in an overpriced and/or volatile local housing market, for larger down payment amounts, and in life situations where your likelihood of moving in two to seven years is greater than average.
If you are interested, check the +Plus site for details and run some preliminary calculations. You may find that it is money well spent if it takes a layer of worry off your hands. If not, then apply that premium money toward some other purpose that does ease your economic concerns.