Earthquake country & accelerated mortgage payments

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
capitalG
Posts: 69
Joined: Tue Mar 18, 2014 8:02 pm

Earthquake country & accelerated mortgage payments

Post by capitalG »

A question for homeowners living in areas at high risk for earthquakes / natural disasters.

We currently own two properties in earthquake country (rental + primary residence) and have been debating how to invest a lump sum. I would love to either pay off the rental (was previously our primary residence - mortgage @ 3.5% w/ another 25 years or so) or make a lump sum payment to our primary residence and recast the mortgage (3.75%, 28 years or so). Unfortunately we do not have earthquake insurance on either property because the cost is prohibitively high. How do you think about accelerated payments in a situation like this - do you minimize equity in the house (i.e. no acceleration) due to the earthquake potential or not consider this?

As context, we already max out our tax advantaged options and have monthly investments into our non-retirement accounts in line with our asset allocation. If we do not accelerate payments, I would likely keep the cash liquid right now and trickle it into our portfolio as I wouldn't feel comfortable investing a lump sum in the the current market.

capG
User avatar
Nate79
Posts: 6729
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Earthquake country & accelerated mortgage payments

Post by Nate79 »

capitalG wrote: Wed Oct 23, 2019 7:49 am A question for homeowners living in areas at high risk for earthquakes / natural disasters.

We currently own two properties in earthquake country (rental + primary residence) and have been debating how to invest a lump sum. I would love to either pay off the rental (was previously our primary residence - mortgage @ 3.5% w/ another 25 years or so) or make a lump sum payment to our primary residence and recast the mortgage (3.75%, 28 years or so). Unfortunately we do not have earthquake insurance on either property because the cost is prohibitively high. How do you think about accelerated payments in a situation like this - do you minimize equity in the house (i.e. no acceleration) due to the earthquake potential or not consider this?

As context, we already max out our tax advantaged options and have monthly investments into our non-retirement accounts in line with our asset allocation. If we do not accelerate payments, I would likely keep the cash liquid right now and trickle it into our portfolio as I wouldn't feel comfortable investing a lump sum in the the current market.

capG
Do you know if you are in a recourse state or not? If you live in a recourse state you owe the mortgage no matter what happens to the asset.
stan1
Posts: 9546
Joined: Mon Oct 08, 2007 4:35 pm

Re: Earthquake country & accelerated mortgage payments

Post by stan1 »

What state are you in? Guessing it is not California which has a state earthquake insurance program.

Then you have to look at the specifics risks of your house. What year was the house built? Do you have unreinforced masonry construction? Is the house built on land subject to liquefaction? Gather the specific risks and make a decision. If the house is recent construction there may be some damage but chance of total loss is minimal. Building codes have changed a lot in California and other states after the Sylmar, Loma Prieta, and Northridge quakes hit urban areas. If you are on a steep hillside that's already subject to movement that's a different story!
User avatar
unclescrooge
Posts: 5506
Joined: Thu Jun 07, 2012 7:00 pm

Re: Earthquake country & accelerated mortgage payments

Post by unclescrooge »

stan1 wrote: Wed Oct 23, 2019 8:08 am What state are you in? Guessing it is not California which has a state earthquake insurance program.

Then you have to look at the specifics risks of your house. What year was the house built? Do you have unreinforced masonry construction? Is the house built on land subject to liquefaction? Gather the specific risks and make a decision. If the house is recent construction there may be some damage but chance of total loss is minimal. Building codes have changed a lot in California and other states after the Sylmar, Loma Prieta, and Northridge quakes hit urban areas. If you are on a steep hillside that's already subject to movement that's a different story!
California's earthquake program is still really expensive.
User avatar
retired@50
Posts: 4113
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Earthquake country & accelerated mortgage payments

Post by retired@50 »

I'd either buy the earthquake insurance and raise the rent, or sell the rental property. Either way, I'd buy an earthquake insurance policy for the primary residence. Regards,
This is one person's opinion. Nothing more.
daheld
Posts: 1007
Joined: Wed Sep 13, 2017 8:14 am
Location: Midwest US

Re: Earthquake country & accelerated mortgage payments

Post by daheld »

I live in a high risk area, have earthquake insurance, and do not think about earthquake risk within the context of pre-paying a mortgage. We are paying ahead on a 30 year mortgage with a plan to pay off in 20 years.
stan1
Posts: 9546
Joined: Mon Oct 08, 2007 4:35 pm

Re: Earthquake country & accelerated mortgage payments

Post by stan1 »

unclescrooge wrote: Wed Oct 23, 2019 9:01 am
stan1 wrote: Wed Oct 23, 2019 8:08 am What state are you in? Guessing it is not California which has a state earthquake insurance program.

Then you have to look at the specifics risks of your house. What year was the house built? Do you have unreinforced masonry construction? Is the house built on land subject to liquefaction? Gather the specific risks and make a decision. If the house is recent construction there may be some damage but chance of total loss is minimal. Building codes have changed a lot in California and other states after the Sylmar, Loma Prieta, and Northridge quakes hit urban areas. If you are on a steep hillside that's already subject to movement that's a different story!
California's earthquake program is still really expensive.
It depends on where you live and what you consider "expensive" to be. That's why you need to assess your home's individual risk and pricing. We live 1 mile from a major fault that hasn't been active in centuries but could produce a 6+ magnitude earthquake and pay about 0.1% of home replacement value per year (0.04% of property value). For us that's not expensive. I'm speculating that we are in a risk/pricing anomaly that may not exist in another location.
WS1
Posts: 334
Joined: Wed Jan 07, 2015 3:45 pm

Re: Earthquake country & accelerated mortgage payments

Post by WS1 »

I’m not a real estate investor, but from what i’ve gleaned over the years I wouldn’t be surprised if they thought stripping equity in a non-recourse state is a good risk management technique.
barnaclebob
Posts: 4331
Joined: Thu Aug 09, 2012 10:54 am

Re: Earthquake country & accelerated mortgage payments

Post by barnaclebob »

How old is the house? If its pretty new or has had a retrofit it could survive an earthquake pretty well with maybe just damage to the drywall.

One cheap thing anyone with gas can do is install an earthquake valve on the gas line that will shut off the gas above a certain amount of shaking. I think a large fraction of earthquake damage is actually from fires following earthquakes. This kind of fire might be covered by normal homeowners insurance though. The cost for that is $300-$500.
User avatar
unclescrooge
Posts: 5506
Joined: Thu Jun 07, 2012 7:00 pm

Re: Earthquake country & accelerated mortgage payments

Post by unclescrooge »

stan1 wrote: Wed Oct 23, 2019 9:14 am
unclescrooge wrote: Wed Oct 23, 2019 9:01 am
stan1 wrote: Wed Oct 23, 2019 8:08 am What state are you in? Guessing it is not California which has a state earthquake insurance program.

Then you have to look at the specifics risks of your house. What year was the house built? Do you have unreinforced masonry construction? Is the house built on land subject to liquefaction? Gather the specific risks and make a decision. If the house is recent construction there may be some damage but chance of total loss is minimal. Building codes have changed a lot in California and other states after the Sylmar, Loma Prieta, and Northridge quakes hit urban areas. If you are on a steep hillside that's already subject to movement that's a different story!
California's earthquake program is still really expensive.
It depends on where you live and what you consider "expensive" to be. That's why you need to assess your home's individual risk and pricing. We live 1 mile from a major fault that hasn't been active in centuries but could produce a 6+ magnitude earthquake and pay about 0.1% of home replacement value per year (0.04% of property value). For us that's not expensive. I'm speculating that we are in a risk/pricing anomaly that may not exist in another location.
That makes sense.
However, for us the premium was about 0.27% of the value of structure (I excluded the land) plus it came with a hefty deductible, which I took to understand as me being responsible for the first $75k of damage. :shock:

Given that I just spent a fortune on retrofitting (bolting down the foundation, and shear walling half the house) I'm hoping it will all pay off.
stan1
Posts: 9546
Joined: Mon Oct 08, 2007 4:35 pm

Re: Earthquake country & accelerated mortgage payments

Post by stan1 »

unclescrooge wrote: Wed Oct 23, 2019 10:24 am
Given that I just spent a fortune on retrofitting (bolting down the foundation, and shear walling half the house) I'm hoping it will all pay off.
Definitely feel doing the retrofit on an older house is money better spent than buying the earthquake insurance.
chw
Posts: 920
Joined: Thu May 24, 2012 4:22 pm

Re: Earthquake country & accelerated mortgage payments

Post by chw »

Nate79 wrote: Wed Oct 23, 2019 8:07 am
capitalG wrote: Wed Oct 23, 2019 7:49 am A question for homeowners living in areas at high risk for earthquakes / natural disasters.

We currently own two properties in earthquake country (rental + primary residence) and have been debating how to invest a lump sum. I would love to either pay off the rental (was previously our primary residence - mortgage @ 3.5% w/ another 25 years or so) or make a lump sum payment to our primary residence and recast the mortgage (3.75%, 28 years or so). Unfortunately we do not have earthquake insurance on either property because the cost is prohibitively high. How do you think about accelerated payments in a situation like this - do you minimize equity in the house (i.e. no acceleration) due to the earthquake potential or not consider this?

As context, we already max out our tax advantaged options and have monthly investments into our non-retirement accounts in line with our asset allocation. If we do not accelerate payments, I would likely keep the cash liquid right now and trickle it into our portfolio as I wouldn't feel comfortable investing a lump sum in the the current market.

capG
Do you know if you are in a recourse state or not? If you live in a recourse state you owe the mortgage no matter what happens to the asset.
If California, I believe it is a non-recourse state. I know many that were able to walk from their underwater mortgages there during the financial crisis in spite of having other financial resources.
User avatar
Topic Author
capitalG
Posts: 69
Joined: Tue Mar 18, 2014 8:02 pm

Re: Earthquake country & accelerated mortgage payments

Post by capitalG »

chw wrote: Wed Oct 23, 2019 11:14 am If California, I believe it is a non-recourse state. I know many that were able to walk from their underwater mortgages there during the financial crisis in spite of having other financial resources.
This is primarily what I was wondering about. Assuming one was OK with the personal impact of giving up their primary residence and credit impact of a default, it would seem prudent to not accelerate payments - minimizes how much money is lost if one decides to walk away due to catastrophic damage. Am I thinking about this the right way?

capG
User avatar
Topic Author
capitalG
Posts: 69
Joined: Tue Mar 18, 2014 8:02 pm

Re: Earthquake country & accelerated mortgage payments

Post by capitalG »

stan1 wrote: Wed Oct 23, 2019 8:08 am What state are you in? Guessing it is not California which has a state earthquake insurance program.

Then you have to look at the specifics risks of your house. What year was the house built? Do you have unreinforced masonry construction? Is the house built on land subject to liquefaction? Gather the specific risks and make a decision. If the house is recent construction there may be some damage but chance of total loss is minimal. Building codes have changed a lot in California and other states after the Sylmar, Loma Prieta, and Northridge quakes hit urban areas. If you are on a steep hillside that's already subject to movement that's a different story!
House built in the '40s, wood frame over concrete slab, not in a liquefaction zone or hill. We do need to make some significant upgrades [bolting, shear walls] to earthquake proof the house but have been putting them off for a couple years as we wanted to do it as part of a larger remodel - any accelerated payments would happen before those upgrades, making me wonder if that is prudent...
User avatar
retired@50
Posts: 4113
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Earthquake country & accelerated mortgage payments

Post by retired@50 »

capitalG wrote: Wed Oct 23, 2019 10:29 pm
stan1 wrote: Wed Oct 23, 2019 8:08 am What state are you in? Guessing it is not California which has a state earthquake insurance program.

Then you have to look at the specifics risks of your house. What year was the house built? Do you have unreinforced masonry construction? Is the house built on land subject to liquefaction? Gather the specific risks and make a decision. If the house is recent construction there may be some damage but chance of total loss is minimal. Building codes have changed a lot in California and other states after the Sylmar, Loma Prieta, and Northridge quakes hit urban areas. If you are on a steep hillside that's already subject to movement that's a different story!
House built in the '40s, wood frame over concrete slab, not in a liquefaction zone or hill. We do need to make some significant upgrades [bolting, shear walls] to earthquake proof the house but have been putting them off for a couple years as we wanted to do it as part of a larger remodel - any accelerated payments would happen before those upgrades, making me wonder if that is prudent...
I suspect that if the retro-fit work is done by a qualified contractor you'll be eligible for a discount on an earthquake insurance policy. Check California Earthquake Authority CEA website before starting work. Regards,
This is one person's opinion. Nothing more.
Post Reply