Weekly Rate & Market Update 3-11-16
Question of the week: Should I get earthquake insurance?
Answer: In the fall our question of the week was if you should consider flood insurance with El Nino in effect (so far the insurance companies are winning on Southern California policies). Since California is on Eastern edge of the “Ring of Fire” there of course exists the possibility (probability?) that we will experience a massive trembler in the future. California’s vulnerability and possibilities to major earthquake(s) have many homeowners are wondering about protecting their primary asset, their home, should a large earthquake hit the region and cause damage to their home.
Whether you should or should not have earthquake insurance is a conversation you should have with your insurance agent who provides your homeowners’ coverage. In California individual companies no long write earthquake policies, rather they provide policies under the California Earthquake Authority (www.earthquakeauthority.com). The CEA provides the coverage, determines the premiums for coverage and deductible options available to you.
When considering earthquake coverage three questions to consider are:
1. What are you protecting
2. What is your deductible
3. What is your cost
1) What are you protecting? How much equity do you have in your home? Are you upside down? Do you have ten or fifteen percent equity in your home?
2) What is your deductible? CEA has two deductible options, 10% or 20% of the coverage. If your dwelling is insured to rebuild for $200,000 then your deductible is either $20,000 or $30,000. Does this exceed your equity in your home? If so do you feel it worth the cost to pay not only premiums but also a deductible to rebuild your home given the current value? If you home is valued at $450,000, you owe $415,000 and your deductible is $20,000 do you feel it makes for your to get earthquake insurance? A difficult question to answer. Finally, if there is partial destruction of your property, but not complete, the cost to repair may be just beyond your deductible, say $30,000 to repair some damage as the house was not a complete loss to the earthquake.
3) What is your cost? Premiums, as you can see by going to the CEA site, depend on a myriad of factors, as most insurance premiums do. Type of home, zip code, deductible, etc all factor into your premium. The analysis of premium comes down to how much it is worth to you per year to insure how much equity against how much of a deductible? It is a risk-benefit analysis that only you can answer, with the assistance of your insurance professional providing the costs and deductibles. If your premium is around $500 per year and you have significant equity you may decide there is a good value in obtaining a policy. If you premium is over $1000 per year, you have little equity and a large deductible you may feel the value of the policy is not worth the premium and should your home undergo significant destruction in an earthquake you are comfortable walking away from the home and the mortgage(s).
In California it is important to note that with a few exceptions earthquake insurance is not required by lenders. (The primary exception is that Freddie Mac requires earthquake insurance on condominiums, Fannie Mae and FHA do not.) Because the insurance is not a requirement of obtaining your mortgage the lender does not need to be listed as a loss-payee for any earthquake insurance policy you may purchase. This means that if you do have cause to submit a claim on your earthquake policy your lender need not be named and therefore a co-payee on any checks or claims paid. In short if you chose not to add your lender as an additional insured they do not have a claim to any funds to pay down/off the mortgage or control who gets the funds for rebuilding etc.
There is no set “yes” or “no” answer to “should I get earthquake insurance?” Every situation is different and every family’s comfort level of risk and benefit is different. Answering the question however is a valuable exercise and one every homeowner should engage in annually when reviewing their insurance coverages.
Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.
Not a lot of news this week moving mortgage rates. Europe has initiated a new round of stimulus through the European Central Bank, however trading in American mortgages was mostly based on technical triggers.
Rates for Friday March 11, 2016: Mortgage Backed Securities (MBS) traded mostly down this week (higher rates) as investors moved to a climbing stock market and took some profits from gains made in the past few months. As you can see from the chart rates for conventional mortgages have climbed two weeks in a row for the first time since late October/early November. Looking ahead we are in an up market and the advice is to lock through your escrow period as soon as you can. (FHA says “flat” as the rate is on the floor and adjustments are to price and credits you get for closing costs).
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.625% Up 0.125%
30 year high-balance conforming 3.875% Up 0.125%
30 year FHA 3.25% *** Flat
30 year FHA high-balance 3.25% *** Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have no points and credit towards closing costs, recent rate change reduces credits
I get a bit curmudgeonly about this time every year due to our switching the clocks ahead for daylight savings time—which means I am back to spending the morning in the dark when I am up and walking the dog. Being a morning person the morning light is more meaningful to me than a longer afternoon. How about you, morning person who will miss the early morning light for the next several weeks or month, or glad to have the daylight later in the day?
Don’t forget to set your clocks before bed on Saturday—and that is ahead not behind (made that mistake once!).
Dennis
