What’s more terrifying than a ghost, goblin or witch hard at work over a steaming cauldron, brewing up a recipe for destruction?
A well-meaning friend or family member, dropping a spooky tale about the sales price of their home back when he or she purchased it at the top of the market in 2006 or 2007 and how it is finally nearly, almost, worth what was paid for it.
If you have been shopping for a home in recent years, chances are strong you have heard a similar story. Truth be told, it is a frightening, woeful tale about sub-prime loans, a shrinking economy and declining home values.
The memories are fresh for some of us, and it is hard to blame someone for encouraging an eager home buyer to exercise a conservative approach and a bit of caution when making such a significant decision.
After all, the national market is now in its sixth straight year of expanding home prices and the real estate market is cyclical in nature. The conventional wisdom is that it is impossible to predict a decline - or to know for certain when a decline is occurring - until the downward spiral has already begun.
As an example, many who bought at the height of the market were simply trapped, as their options were narrow: sell, and take a huge loss; rent it out, and get less than the price of the monthly mortgage payment.
Sometimes, reality is a lot more horrifying than fiction.
Luckily, a new product just launched that was designed to allay some of the fears associated with purchasing a home. Down payment insurance can help calm some of the jitters people have about the financial implications of purchasing at the height of the market.
Accumulating enough capital to use as a down payment is one of the biggest barriers to home ownership. With that in mind, it is certainly understandable that people would want to protect their investment and create a hedge against the risk of home prices beginning to decline.
The down payment insurance currently available will protect a down payment of up to 20 percent of the purchase price. The maximum amount a homeowner can get back is $200,000, and the initial coverage period is seven years from the purchase date. What this means is that if you sell your home for a loss within the first seven years of ownership, you could be eligible for a refund of your down payment.
Consider the following example, in which a buyer purchased a home for $200,000, using a $40,000 down payment and taking out a $160,000 mortgage. Four years after the date of purchase and the individual hits a roadblock, experiencing health issues and a slower economic climate that necessitates the sale of the property.
Although the home is only worth $170,000 at that point, the individual is forced to sell it anyway. This results in a loss of $30,000 off the original down payment. If the individual had the foresight to purchase down payment insurance on the date of closing, it would have covered that amount.
Buying the insurance adds approximately 0.125 percent to 0.625 percent to the mortgage rate, depending on the amount of the down payment. A potential success strategy for obtaining this insurance could be to keep the loan for six months, and then do a no-cost refinance to decrease the interest rate, capitalizing on the fact that the coverage will stand for seven years, regardless of whether or not you refinance.
For an in-depth analysis about down payment insurance, or for information about how to find a company in your area that offers down payment insurance, give me a call at the number below.
Patrick Stoy (NMLS Numbers 39527 and 39166) has 18 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.
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