American home buyers and refinancers are about to be offered a type of mortgage they've never encountered before: a loan with a built-in unemployment insurance fund.
Borrowers who take out one of the new financing packages are guaranteed up to six months' worth of their full monthly mortgage payments--principal, interest, taxes and other escrow items--if they should become "involuntarily unemployed" at any time during the first three years of the loan term. After three years, they can renew the coverage for extended periods. If the borrower loses his job and the coverage kicks in, payments flow directly from the insurance company to the lender, and the unemployed borrower is never recorded as having been late or in default.
The program, dubbed "Mortgage Guard" by the insurance companies that designed it, is intended to be a flexible, add-on option to virtually any type of home loan. Home builders could offer it as an extra attraction at no direct cost to consumers. A home seller could offer it through a lender as an inducement to potential buyers.
Mortgage lenders are likely to customize and integrate it into their loan menus. One mortgage banker active in more than 30 states plans to introduce it before the end of the month as the "Breathe Easy" mortgage, at a rate one-eighth of a percentage point higher than the typical loan. The program is expected to be available in most states in the first half of 2000.
Why launch a product like this in the midst of the strongest economy and lowest unemployment in decades? The sponsors of the plan, Great American Insurance Companies in Cincinnati and Mortgage Payment Protection Inc. in Altamonte Springs, Fla., answer this way: Sure, the national economy is hot, but mortgage defaults and foreclosures remain a market-by-market problem for lenders. A significant percentage of early defaults in home mortgages occur "because of corporate downsizings, mergers and acquisitions, sudden closures of plants and offices," said Teri Cooper of Mortgage Payment Protection.
Corporate consolidations can strike suddenly, throwing people out of work. "It can be devastating to homeowners faced with monthly mortgage bills," Cooper said.
As with any insurance, you must read the fine print carefully to see what the new unemployment protection covers--and doesn't cover. The insurance pays for up to six months of mortgage bills if you:
* Work for a salary or wages for at least 30 hours a week, and have been doing so for at least three months before applying for coverage.
* Have no knowledge of "any impending involuntary unemployment at the time of loan closing." If your company has already warned you about upcoming layoffs, you won't qualify for loan payment insurance.
You also won't qualify if you're self-employed, work for a relative or own 25 percent or more of the company that employs you. Nor will you qualify if you quit, go on strike, retire or lose your job because of a disability or "criminal conduct."
If you lose your job, you have to "file and qualify for state unemployment compensation." Payments flow to your lender only after you've been out of work for 31 consecutive days.
The cost of the coverage? Choosing it as an option for yourself--as opposed to having a builder or property seller pay for it--will typically add one-eighth to one-fourth of a percentage point to the note rate.
For example, Pinnacle Financial Group of Orlando plans to provide the insurance for an eighth of a percentage point on top of its average $150,000, 8 percent fixed-rate home loan. The premium will add $13 a month to the mortgage payment. As home mortgage interest, the $13 will be tax-deductible.
But is the coverage you get worth even that small add-on? Scott Maxwell, senior vice president for residential mortgages for Atlanta-based SunTrust Bank, said borrowers "have to ask themselves, is there any chance whatsoever that I'm going to lose my job" in the next several years?
"If the answer is no, don't get it. But if the answer is maybe, then the peace of mind the insurance gives you might be worth it," Maxwell said, compared with losing your house or messing up your credit record. Maxwell plans to test-market the insurance on new home buyers beginning next month.
Maxwell's formulation could be the right one for you. But here's another thought: If you lost your job involuntarily, could you get another one with the income necessary to support your current mortgage after the six-month deadline? Mortgage Guard is a six-month tourniquet during the first three years. Without renewal at an additional premium, it offers no home-saving help beyond that--even though the original one-eighth or one-fourth percentage point premium can run for up to 30 years.