Earthquake insurance doesn't seem to make sense if you have a mortage (Santa Rosa: mortgage, credit)

[HappyinCali]

So I have been researching earthquake insurance and I realized that if you have a mortage that’s under 60% of the value of the house, it is probably not worth it. If your home is totaled in the event of an earthquake, they will make the check to the mortgage company and not to you. So let’s say you have a $1 mn home with a $700k mortgage and it will cost you $400k to rebuild.

Your deductible will be $40k. The actual cost of the rebuild will probably be like double that, because presumably a lot of others will be rebuilding too, so $800k.

So your insurer will write your mortgage company a check for $360k. You will still owe your monthly payment. If you decide to rebuild, the bank will sign the check over to you and as long as you keep making the payments you can use it to defray the rebuilding costs.

However, you will still be on the hook for $440k of rebuild costs + your mortgage. Your equity is a big question mark – if Christchurch is any indication, your house price will likely sky rocket within a year or two, because of lack of supply. But that’s hard to decide.

I think the decision you are making is really – is my credit history worth $440k in cash. Because you can essentially just walk-away and lose your $300k of equity and that’s it. It doesn’t really matter if the bank defaults you for $100k or $700k, the default is the default.

Or do you spend $440k to see if you can salvage your $300k in equity + your credit history.

I feel like walking away from the house with $440k in cash (if you have it) and a crappy credit history is the much better option that all the nerves you will spend rebuilding, getting paid, managing bank and insurance etc.

What do you think? Does this make sense or am I missing something?

And let’s not make this into a morality thing. It is not. The bank made a loan secured by a collateral. You promise to either repay it or give them the collateral. If the collateral becomes worthless due to an act of God, that’s not your fault and you have kept your end of the contract. You have given them their collateral. It is just not worth as much as the bank thought. That’s their fault. You are not required to have an earthquake policy. You are required to have a homeowner's policy

[marcopolo666]

Well, good for you. Thanks for sharing (well, not really).

[Tulemutt]

... or, you can live on a boat or in an rv.

[Amy WJ]

You're assuming the cost to rebuild will be double and the rest of your argument is based on that assumption. What if it's not double? How has it actually worked in other cities that burned down? For instance, in Santa Rosa after the big fire, rents were sky high (supply and demand) but I don't know about building costs. Were they double the amount specified by insurance?

[Ceece]

If it makes you feel better I personally don't know a single person with EQ insurance. A quick Google shows that only about 17% of all homeowners in CA have it. If people here are giving you a hard time it's a good bet they aren't homeowners or don't have it either.

[CA4Now]

We have never NOT had earthquake insurance. Having lived through the Sylmar quake--although not living in The Valley then but seeing and feeling the damage it did, even as a kid--I can't imagine taking the risk of not having it, no matter how much or little equity one has in their home.

[aslowdodge]

Originally Posted by Amy WJ

You're assuming the cost to rebuild will be double and the rest of your argument is based on that assumption. What if it's not double? How has it actually worked in other cities that burned down? For instance, in Santa Rosa after the big fire, rents were sky high (supply and demand) but I don't know about building costs. Were they double the amount specified by insurance?

I think contractors will be boosting their rates for rebuilds as the demand would allow them to do it. Logistics would be a lot harder after an earthquake. MYbe new building codes would increase costs?
Having had a property in an area where a hurricane hit, I know just finding someone to rebuild would be extremely hard and expensive.

[Amy WJ]

Originally Posted by aslowdodge

I think contractors will be boosting their rates for rebuilds as the demand would allow them to do it. Logistics would be a lot harder after an earthquake. MYbe new building codes would increase costs?
Having had a property in an area where a hurricane hit, I know just finding someone to rebuild would be extremely hard and expensive.

Good points. Also the time to take to rebuild would be a consideration. What did you do after the hurricane? Were you able to rebuild?

[aslowdodge]

Originally Posted by Amy WJ

Good points. Also the time to take to rebuild would be a consideration. What did you do after the hurricane? Were you able to rebuild?

Sadly no. The bank wouldn't return the insurance check endorsed and I had no funds to repair the damage which just got worse and worse as time passed because things were exposed. You also couldn't come close to finding a contractor and lot's of shady repair people popped up when they saw thew demand.

[Amy WJ]

Originally Posted by aslowdodge

Sadly no. The bank wouldn't return the insurance check endorsed and I had no funds to repair the damage which just got worse and worse as time passed because things were exposed. You also couldn't come close to finding a contractor and lot's of shady repair people popped up when they saw thew demand.

Wow, that is sad. Sorry you had to go through that. When we had a house in Virginia we had a hard time finding decent contractors who would even show up or return calls to give quotes under normal conditions. This seems to bolster the idea that it's best to walk away. Also makes me wonder about owning a home outright vs. having a mortgage that you can walk away from when disaster hits.