Anvil real estate agent Mike Cambra received an unexpected text message from a sales agent at a Rancho Mission Viejo homebuilder in April of last year.
His clients, who were already under contract and waiting for their new condo to be built, were informed that due to increased fire insurance charges, they would have to accept a monthly HOA increase of $547 in order to close the deal.
The new HOA fee would be $915 per month, significantly higher than the original charge of $368 per month. And that didn’t even include the $286 community association fee. It’s important to note that HOA fees often cover insurance for the exterior-to-studs part of the property, but not necessarily the interior or contents of the home.
In an effort to mitigate the impact of the HOA fee hike, the builder offered a $40,000 mortgage rate buydown credit. However, Mike’s buyers declined the offer due to concerns about their long-term affordability of insurance.
After several major insurance providers ceased issuing new policies and began canceling existing ones, Governor Gavin Newsom signed an executive order on September 21st to expedite the rate approval process for insurance carriers who argued that rates needed to increase to cover rising costs. The objective is to encourage more policies to be written quickly.
Based on my intuition, this process will lead to a flood of new fire insurance options and drive up rates.
Matt Murvay, an insurance broker at Murvay Insurance Services, has been in the industry for 18 years. He predicts that rates will increase by 20-30% starting next month.
The California Insurance Commissioner’s Office provided me with a list of 12 insurance companies that hold market shares ranging from 2% to 21%. These include State Farm, Farmers, CSAA, Liberty Mutual, Mercury, Allstate, USAA, Auto Club, Travelers, American Family, Nationwide, and Chubb. The pending and approved rate increases for 2023 range from as low as 3% to as high as 40%.
According to Michael Soller, the communications and press relations representative for Insurance Commissioner Ricardo Lara, these 12 insurance groups represent 84% of the homeowners market. Over the past two years, Farmers, CSAA, Mercury, USAA, Nationwide, and American Family have all received approvals for rate increases.
“The issues facing the California insurance market are complex, which is why our strategy involves more than just rates. We also focus on incentivizing wildfire safety and implementing forward-looking models,” Soller told me.
What about the California FAIR Plan, which offers policies to homebuyers or owners who are unable to obtain coverage from standard fire insurance providers due to high-risk properties or circumstances?
Michael Soller stated in an email that after thorough review by rate regulation experts, the Department of Insurance approved a 15.7% increase for the FAIR Plan’s dwelling fire filing, rather than the requested 48.8% increase.
So, ask yourself, can you really afford the cost of fire insurance now and in the future?
Murvay shared an example of already high fire costs. A 4,000-square-foot home in Aliso Viejo was quoted at $5,000 per year for a buyer with no prior insurance claims. That’s an average monthly cost of $417. Assuming a 25% rate increase, the annual payment would rise to $6,250 or $521 per month.
Where will rates and prices be in two or five years?
Aside from certain adjustable-rate components in 30-year mortgages, lenders assess your qualifications and make credit decisions based on the present.
To make an informed decision about whether you can truly afford insurance for the home you’re considering, it would be wise to project worst-case scenarios for your future finances.
And don’t stop at insurance. Consider your job stability. Will your income keep up with general inflation rates? Is your industry secure?
If you’re planning to start a family, have you considered the financial implications? Will one of you be staying at home permanently? How will you replace the lost income and still afford your new living situation? Will you need funding for childcare?
Murvay explained that some insurance carriers conduct a CLUE (Comprehensive Loss Underwriting Exchange) report on homebuyers, particularly in relation to their previous addresses. This can have a negative impact, especially if there were previous water damage claims, leading to policy denials.
Based on my experience with mortgage clients, buyers will face higher costs if they’re looking in an area considered high fire risk by the insurance industry or according to the state fire marshal’s map.
Whether you’re house hunting or already a homeowner, make sure you give due consideration to the impact of insurance inflation rates on your budget.
Hoping that you can continue to afford the rising costs is not a strategy or solution. If you can’t afford it, consider purchasing a more affordable property. If you can afford to keep your current home, start thinking about an exit strategy before you run out of funds.
Freddie Mac rate news
The average rate for a 30-year fixed mortgage increased by 8 basis points to 7.57% compared to last week. The average rate for a 15-year fixed mortgage increased by 11 basis points to 6.89%.
The Mortgage Bankers Association reported a 0.6% increase in mortgage applications compared to the previous week.
Bottom line: If a borrower secures the average 30-year fixed rate on a conforming $726,200 loan, their monthly payment would be $320 higher than it was last year, amounting to $5,113.
Locally, well-qualified borrowers can obtain the following fixed-rate mortgages with one point: A 30-year FHA loan at 6.75%, a 15-year conventional loan at 6.625%, a 30-year conventional loan at 7.25%, a 15-year conventional high balance loan at 7.5% ($726,201 to $1,089,300), a 30-year high balance conventional loan at 7.875%, and a jumbo 30-year fixed loan at 7.375%.
Please note that the 30-year FHA conforming loan is limited to $644,000 in the Inland Empire and $726,200 in LA and Orange counties.
Eye-catching loan program of the week: A 30-year adjustable-rate mortgage with interest-only payments for the first five years, offered at a rate of 7.5% with 1 point cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected].
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