If you live in a flood-prone area and have standard flood insurance, the coverage may not be enough. You may need excess flood coverage.
And you’ll want to figure it out before a flood occurs—doing so can protect your home and finances from mother nature’s unexpected curveballs.
Chris Black, agency principal of Chris Black Insurance and Baldwin Risk Partners, says, “Consider the potential damage a flood could cause to your home. If you live near a large body of water, especially if there is a levee or dam, consider getting excess flood insurance.”
So, how do you determine whether it’s right for you? Here’s everything you need to know.
What exactly is excess flood insurance?
The federal government’s National Flood Insurance Program (NFIP) provides a layer of protection from water disasters. So if you bought standard flood insurance through the NFIP, you’re off to a good start—keyword being “start.”
When do you need excess flood insurance coverage?
That’s because NFIP policies offer limited financial protection, which may not be enough to protect you from financial damage in the long run.
Excess flood coverage—offered through private companies—protects you from that damage. It supplements your NFIP policy and provides that extra layer to give you complete coverage, rather than partial.
3 reasons you need excess flood insurance
Here are three ways excess flood insurance can protect you.
1. The value of your home exceeds the NFIP payout limits.
An NFIP policy only covers up to $250,000 for damages to residential property and up to $500,000 for commercial property. If your home or business is worth more than these coverage limits, the bank will require you to get excess flood insurance. The bank may also require excess flood insurance if you owe more than $250,000 on your home.
2. The contents of your home are worth more than NFIP’s maximum coverage amount.
NFIP policies offer $100,000 to cover the contents of your home. If the value exceeds that limit, you won’t receive complete reimbursement. So if you own pricier possessions, you’ll want to consider the added layer of protection that excess flood coverage can provide.
3. You seek expanded coverage for items excluded from a standard flood insurance policy.
NFIP policies contain exclusions that can be costly if you don’t have excess flood insurance. For instance, standard flood insurance doesn’t provide coverage for additional living expenses should you have to live elsewhere while your home undergoes repairs.
Other exclusions with standard policies include damaged property outside the building such as decking, swimming pools, and septic tanks.
Is excess flood insurance required?
Even if you don’t want to get excess flood insurance and wish to chance it, your mortgage company might require it.
Many companies will make you purchase excess flood insurance if your home is worth more than $250,000. It will kick in once you reach the limit with the primary flood insurance, which ensure that you’re completely covered.
Excess flood insurance policies also provide loss-of-use protection. That means you’ll receive reimbursement for having to stay somewhere else while your home is being repaired.
Your mortgage company will require you to submit proof of insurance each year. If you let your policy lapse, the company will usually give you 30-45 days to provide proof of renewal.
If you fail to do so, they will purchase excess flood insurance for you and then bill you.
Is excess flood insurance expensive?
The rates vary. The insurance company determines how much you’ll pay based on the following factors.
- How much coverage you want/need to buy.
- The location of your home and if it’s in a flood zone (check here).
- How far your home is from a body of water, such as the ocean or a lake.
- The age of your home.
- The elevation of your house.
- If your home is a condo or townhome, and on what floor it’s located.
- Which way your building faces (the ocean or inland).
- How much deductible you want to pay.
Excess flood insurance exclusions
Excess flood insurance will only apply if your home becomes involved in an actual flood. If your home floods, but no other homes in your area do, that isn’t categorized a flood.
To qualify as a flood, the flooding must affect at least two homes and/or two acres. Basements are also tricky because of their low-lying location. Damage to basements and their contents are generally not covered.
Other items excluded from flood insurance coverage:
- Cash and valuables like art and jewelry.
- Lost rental income on an investment property.
- Homes located in areas that insurers consider excessively risky.
Preparation helps prevent excessive flood loss
Of course, it’s ideal if you can prevent flood damage from occuring. While you can’t control Mother Nature, you can prepare ahead of time. Put a risk management plan in place to protect yourself.
Home improvements that protect you from flood damage have the additional benefit of lowering your flood insurance rates. For instance, increasing the freeboard height of your home by 3 feet could reduce your monthly flood insurance premium by $266 according to a report by FEMA.
Do an inventory of your valuables and consider ways you can protect them if flooding occurs. For instance, storing the items in elevated locations in the home. You may also wish to buy a waterproof safe.
Tips for buying excess flood insurance
Even with its limitations, excess flood insurance is a smart purchase.
Says Black, “We recommend that all homeowners carry flood insurance and that some carry excess as well. The fact is that 25% of all floods happen in low-risk areas. And considering that 90% of all natural disasters include excess water, flooding can occur anywhere.”
To decide how much coverage you need, consider the worth of your home. Also, look at how much money you invested in your house and what it would take to cover that amount.
Make sure to shop around and compare top flood insurance companies side-by-side to find the best policy for you.
Do you need a larger down payment to avoid a PMI on your dream home? Or are you looking to tap into your home’s equity without getting into debt? Shared equity mortgage companies are offering buyers lump sums, long terms, no monthly payments, and no interest. Sound too good to be true? Well, there’s a catch. You will have to share the profits if your house increases in value. You will also have to pay back the investment in one go at the end of the term or when you sell the house. On the flip side, the investor also shares the risk and will receive a smaller payment if the value of your home drops.
But shared equity can still be very beneficial in certain scenarios. Read on to learn everything you need to know!
What is a shared equity agreement?
A shared equity agreement is a financial agreement that allows another party to invest in your property and acquire a stake in its future equity.
For example, say you are buying a home but are short on your down payment. You could partner with a shared equity mortgage company who can lend you part or all of the down payment. In exchange, they get a stake in your property and its future appreciation or depreciation.
You won’t have to make any monthly payments on the amount, nor pay any interest. When the term is up, whether triggered by a set number of years or the sale of the home, you’ll repay your investor. How much you pay depends on whether your property’s value went up or down.
Shared equity agreements are also available for homeowners who want to liquidate part of their equity. You can receive a portion of your equity in cash and won’t have to make payments or pay interest. At the end of the term, you repay the amount plus or minus the appreciation or depreciation. Leading shared equity agreement finance companies include Unison and Patch.
How does it work?
Here are a few examples of shared equity agreements in action.
Scenario 1: Securing a down payment
Johnny wants to buy a home that costs $250,000. To avoid PMI, he needs to put down $50,000. He saved up $25,000, but isn’t sure how to get the rest. He hears about a shared equity investment company and finds out they will lend him the other $25,000.
Equity sharing agreement
Johnny’s chosen shared equity company sets the agreement length at 30 years. That means he won’t have to make a single repayment on the amount until he sells the home or thirty years have passed, whichever comes first. At the end of the agreement, Johnny will repay the initial investment along with 35% of the property’s gain or loss over the span of the agreement.
15 years later, Johnny is ready to sell his home. Depending on how the value of his home has changed, here’s what could happen.
- If Johnny’s home has increased in value to $350,000, he’ll owe the investor the initial investment of $25,000 plus 35% of the $100,000 gain ($35,000). The total payment would be $60,000.
- If the value of Johnny’s home stayed the same, he would owe the investor the initial investment of $25,000 and nothing more.
- What if Johnny’s home value drops to $200,000? He’ll need to repay the difference between the initial investment ($25,000) and the investor’s percentage of the loss (35% of -$50,000=-$17,500). The total repayment amount would be $7,500.
|Scenario #1||Initial home value||Home value at time of repayment||Investment amount||Investor Stake||Total gain/loss||ROI for investor||Total repayment due|
Scenario #2: Cashing out some home equity
Julie has a home worth $500,000. She still owes $300,000 on her mortgage and has $200,000 in home equity. She wants to cash out $50,000 and reaches out to an equity sharing company to make it happen.
Equity sharing agreement
Julie agrees to sell $50,000 of her equity in exchange for a 25% stake in her home’s appreciation over the next 10 years.
When the 10-year term is up, it’s time for Julie to pay. Here are three possible outcomes:
|Scenario #2||Initial home value||Home value at time of repayment||Investment amount||Investor Stake||Total gain/loss||ROI for investor||Total repayment due|
In the appreciation scenario, Julie’s home increases in value to $550,000. She’ll have to repay the initial $50,000 plus 25% of the $50,000 appreciation, for a total of $62,500. She is not ready to sell her house, so she’ll have to pay out-of-pocket or refinance the debt.
However, refinancing the debt will result in additional financing fees. And even if she sells her home, the $37,500 she gains from the appreciation won’t cover the full $50,000 repayment. This outcome could be problematic for some homeowners.
Before making a shared equity agreement, check market trends and predictions to make sure you’ve got a good chance of gaining money instead of losing it. Use a table like those in the examples above to figure what you would end up paying in a variety of circumstances.
How do you compare shared equity agreements?
When comparing home equity sharing partners, consider the following factors:
- Triggers for repayment. Under what circumstances will you need to repay the company’s investment? Most will require repayment if you sell the home or hit the maximum time limit (often 10 to 30 years). You may prefer a shorter term, or need a longer term to repay the amount in full.
- Stake in gains/losses. The stake an investor requires in your future appreciation or depreciation will vary. This is very important, as it determines how much you’ll have to pay in the end. Use the tools below to find the best deal.
- Fees. Some companies charge servicing fees at the outset of the agreement (e.g. 3% of the financing amount). Further, they may charge you a home appraisal fee, escrow fee, and title fee. Factor all fees into the total cost before making your decision.
- Investment amounts. The amount a company will invest can vary. Compare maximum loan-to-value limits (e.g. 80% max LTV) as well as minimum and maximum dollar limits (e.g. $150,000).
- Eligibility. Some companies offer shared equity agreements to both homeowners and homebuyers, while some only serve one or the other. Further, you will have to apply and get approved based on your creditworthiness and location. Look for a partner that suits your needs.
- Financing timeline. How long it takes to get your money varies from one company to the next. Depending on how fast you need the money, you may prefer one company over another.
- Reputation. Check into the company’s reputation. How do past customers feel about their experiences with the company? Is the company recommended by unbiased third parties? Look for companies with an overall positive reputation.
By vetting companies according to these factors, you will be able to find the company that offers the best value for your needs.
Frequently asked questions
Still have questions? Here is a collection of common questions to help you better understand shared equity agreements.
What is equity sharing?
Equity sharing is spreading the worth, risk, and ownership of a property to more than one person or party.
Where do equity sharing companies get their funding?
Several of the leading companies in the industry get their funding from the pension funds and endowments of private investors.
Who can benefit most from a shared equity agreement?
The people who benefit most from shared equity agreements are homebuyers who can afford the monthly payments on a house but not the down payment. Shared equity agreements also benefit homeowners who have equity but are low on liquid assets.
Does a shared equity agreement grant the other party occupancy rights?
The agreement does not grant occupancy rights to the investor. However, there will be a lien against your property as with a typical home loan.
Can I pay back the investor early?
Most companies allow you to pay back the investment early without any prepayment penalty.
However, some require you to wait a minimum amount of time in order for the investor to share in negative equity (e.g. three years). The final payment amount will depend on the value at the time of repayment.
Is equity sharing better than other borrowing options, like a HELOC, cashout refinance, or second mortgage?
The main benefit of an equity sharing agreement is that you won’t have to make any monthly payments. Further, you don’t have to pay interest. It is an investment contract rather than a loan agreement.
Whether it is better than the other options depends on your circumstances. If you can’t afford additional payments but need access to cash, it may be the best option for you. And if your home appreciates enough to cover the initial investment while also earning you some profitability, it can be a perfect solution.
However, you may find yourself at the end of the agreement with a large bill to pay and no way to do so. It’s important to consider all your options and to calculate how much each is likely to cost you overall. Then, you can weigh the costs and benefits to find the right solution for you.
What is a shared equity mortgage?
Some lenders offer mortgages bundled together with shared equity agreements. In these cases, you’ll make mortgage payments to the same lender that has a stake in your property. This is called a shared equity mortgage.
How is the value of my home determined?
Shared equity companies hire independent third-party appraisers to appraise your home when you request the agreement, as well as when it’s time to repay the investment.
What types of homes are usually eligible for equity sharing?
Each investor or investment company sets its own rules for the types of homes it will consider. However, single-family homes, condos, and townhouses are usually eligible. Co-operative housing and tenancy in common (TICs) may be considered on a case-by-case basis.
Some companies require owner occupancy, while others will also invest in secondary homes, rental properties, and investment properties.
Can you get an equity sharing contract in addition to a mortgage and home equity loan?
Most investors look at your loan-to-value (LTV) ratio to determine if you qualify. Calculate LTV by dividing the amount borrowed by the value of the property.
As long as your LTV is under the investment company’s limit, you can often still qualify, even if you already have a home equity loan. LTV limits often range from 70% to 80%.
However, be careful not to borrow more than you’re able to pay back.
Can you remodel your home after signing an equity sharing agreement?
Most companies don’t restrict you from remodeling your home — remodeling often increases the value of the home, which will benefit both of you.
Is shared equity right for you?
Here is a list of the benefits and the drawbacks to consider.
- Liquidate home equity or receive a lump sum to buy a home.
- No interest.
- No monthly payments.
- Share in losses and gains.
- You may repay less than you borrowed if your home loses value.
- May be able to refinance the balloon payment into a new mortgage.
- May be able to repay the total from your gains.
- Must get approved based on home, situation, and creditworthiness.
- A lump sum repayment can be difficult if your home did not significantly increase in value.
- Fees often apply.
Is a shared equity agreement is right for you? It depends on your situation, preferences, and the deal you can get. However, it is an interesting new alternative to traditional lending. The concept of not repaying a lump sum on a monthly basis can be liberating for some. But be sure to look at the whole picture before signing on the dotted line.
Julie Bawden-Davis is a widely published journalist specializing in personal finance and small business. She has written 10 books and more than 2,500 articles for a wide variety of national and international publications, including Parade.com, where she has a weekly column. In addition to contributing to SuperMoney, her work has appeared in publications such as American Express OPEN Forum, The Hartford and Forbes.