As we move further into the hot spring market, home prices in many markets are almost certain to rise. For owners that still have underwater mortgages this is great news. But for buyers, the continuous increase in prices is leaving them skeptical that the market might again crash and many mortgages (including ones they buy today) will again end up underwater.
The underwater mortgage crisis peaked in December of 2009 when approximately 12 million homeowners found themselves with a home having a negative value compared to the outstanding loan balance. Today that number remains as high as 4 million houses.
New Insurance Product
If you start with less than a 20 percent down payment, you will almost certainly be required to take out mortgage insurance to qualify for a loan. That insurance protects the lender but not the homeowner. A Dallas based company named ValueInsured recently began offering what is believed to be a first of its kind insurance. The policy is intended to protect the homeowner’s down payment in the event they need to sell when the mortgage is underwater. The new product (+Plus) repays the home seller in the event it of a loss money rather than paying the lender.
An example is you make a 10 percent down payment on a $200,000 dollar house. That amounts to $20,000 coming out of your savings or other sources of funding. At the time of purchase, you can elect to take out a +Plus policy with a one time premium of about $1,200. The policy will remain in effect for 7 years. Four years into the mortgage, your job transfers you to another location that requires you sell your existing home. However, the value of your home has declined by $5,000. ValueInsured would be expected to pay the homeowner (seller) for that negative equity up to the full amount of the down payment, with an absolute cap of $200,000 for expensive homes.
Limitations to This New Product
Being a new product, it’s important to look at possible limitations that might not support your needs. First, there is a requirement that the home be owner occupied which excludes rentals. If the home is a personal vacation property, you should read the fine print in the contract. Second, ValueInsured doesn’t accept your sales price as the actual value of the property. ValueInsured values homes based on a government index that tracks values at the state level rather than the city or neighborhood level. That index is provided by the Federal Housing Finance Agency.
ValueInsured will pay the lesser of the actual sales price or the value based on the index. Home values vary not only based on state values but also right down to a street by street basis in the neighborhood you are living. This could result you in receiving less than your actual loss or even nothing at all.
This product may appeal to some people but its value is questionable for most. For at least 75 years, the vast majority of homeowners saw the value of there homes steadily increase. It was only during the Great Recession that millions saw home values with underwater mortgages. Today, most homeowners have equity in their homes and continue increasing that equity with every mortgage payment made. This new product should probably only appeal to people in volatile markets.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. In the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.