Down Payment Insurance: Smart Protection or Total Waste of Money?

While home prices continue to rise, the risk of another housing bubble is starting to take shape and with a bubble comes the possibility that it will burst, resulting in th loss of a big chunk of your life savings.

Fortunately, or not, depending on how you look at it, there is a new product hitting the real estate market that has never been available to consumers before now and is promising to protect your down payment money from falling home prices.

ValueInsured recently introduced down payment protection that will cover your loss if you must sell your house at a loss, but there are a number of exclusions.

As an example of how this new product works, a new homeowner can purchase insurance for their down payment of up to 20 percent, with a cap at $200,000. They must pay a one-time premium at the time they close on the house.

Rates vary depending on the state you are buying a home in as well as the size of the down payment that you are hoping to insure.

Once the policy is in place, new homeowners are protected (at least their down payment) in the event that house prices fall and the policyholder has to move due to a work transfer or sudden need for a larger home (they have twins). The policy will make up any difference in the down payment lost to having to sell in a down market.

Where is it available?

Homebuyers in every state and Washington D.C. can purchase a policy directly from ValueInsured.com or if they are using Amalgamated Bank to secure a mortgage, they can have the premium included in their Amalgamated mortgage.

While prices will vary by state, a Colorado homeowner who was putting down a 10 percent deposit on a $350,000 house would be looking at a one time payment of $1,998 to cover their $35,000 down payment.

Insuring your down payment sounds like a good idea and while life is certainly unpredictable and it is always possible that relocation could force the sale of your house, there are a number of limitations that come with the ValueInsured product.

Policyholders have to wait two years before they can actually file a claim, which limits its usefulness. In addition, coverage ends seven years after you close on the house, the home must be your primary residence, you cannot be renting it out.

Other restrictions include no coverage for a foreclosure or even if your house is grabbed by the local government under eminent domain.

Finally, this is only down payment insurance, and ValueInsured uses the federal housing index in each state to determine how much the price of an individual residence declined. According to their literature, you will receive a check for whatever amount is less, the down payment, your lost equity or the amount the local index dropped.

It also doesn’t cover any costs related to selling or buying a home and doesn’t take into account any upgrades you may have made to the property.

Is it worth it?

In many cases the answer is no but in others, especially super hot markets, it may be worth a look at the new ValueInsured insurance product.

Here’s an example of why it may not make a lot of sense. If you sold the $350,000 house we talked about earlier at $320,000 and experienced a $30,000 loss, you would expect ValueInsured to cut you a check for $30,000 as that is a lower amount than your down payment of $35,000. However, if your local housing index only recorded a 4 percent market loss, you would be getting a check for a measly $14,000.

While you may never get your full deposit back, its possible that in an overheated market, the risk may be worth it. People that have to bid well over asking price to get their offer accepted may find themselves underwater if the market cools down. In this particular case, this type of insurance may be worth the cost.

If you decide to move forward with a ValueInsured policy, be sure that you read the contact very carefully and ask questions about anything you do not understand. Pay particular attention to any listed exclusions.