Why house payments will likely soar along with rising insurance rates

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | October 16, 2023

Article originally posted in Orange County Register on October 13, 2023.

Anvil real estate agent Mike Cambra got a surprise text from a Rancho Mission Viejo homebuilder sales agent last April.

Due to the increased fire insurance charges, his clients — who were under contract and waiting for their new condo to be built — would have to accept a $547 monthly HOA increase if they still wanted to seal the deal.

The new HOA would be $915 per month instead of the original $368 monthly charge. And that didn’t include a $286 community association fee. It’s important to note that HOA fees often cover insurance on the exterior-to-studs portion of the property, but it doesn’t always include the interior or contents of the home.

To help counter the HOA fee hike, the builder offered a $40,000 mortgage rate buydown credit. Mike’s buyers declined due to their long-term insurance affordability fears.

“I’m going to move forward with canceling the reservation for now,” wrote Cambra in a text to the agent after his clients decided it was just too much money for the added fire insurance cost. “It’s been a pretty frustrating process.”

After several major insurance providers stopped issuing new policies and began canceling myriad others, Gov. Gavin Newsom signed an executive order on Sept. 21 to speed up the rate approval process for insurance carriers who insisted rates should rise to meet their rising costs. The goal is to get more policies written and fast.

My hunch says this process will open a spigot of new fire insurance choices and also send rates soaring.

Insurance broker Matt Murvay of Murvay Insurance Services has been in the business for 18 years. He’s predicting rates “will increase 20-30% starting next month,” he told me.

The California Insurance Commissioner’s Office provided me with a list of 12 insurance companies with market shares ranging from 2% to 21%. They include State Farm, Farmers, CSAA, Liberty Mutual, Mercury, Allstate, USAA, Auto Club, Travelers, American Family, Nationwide and Chubb.  The 2023 pending and approved rate increases provided by the state range from as low as 3% to as high as 40%.

These 12 insurance groups represent 84% of the homeowners market, wrote Michael Soller, communications and press relations for Insurance Commissioner Ricardo Lara, in an email on Thursday. Over the past two years, Farmers, CSAA, Mercury, USAA, Nationwide, and American Family have all received approvals for rate increases, he said.

“The problems facing the California insurance market are complex, which is why our strategy does not focus on one element such as rates but also incentivizes wildfire safety and forward-looking models,” Soller told me.

And what about the California FAIR Plan, which offers policies for homebuyers or owners shut out of standard fire insurance providers because they have properties or situations too risky for mainstream carriers?

“After thorough review by our rate regulation experts, the Department of Insurance approved the FAIR Plan’s dwelling fire filing for a 15.7% increase, not the 48.8% requested,” said Michael Soller, communications and press relations for Commissioner Lara in an email.

So, ask yourself, now and later, can you afford to pay the price for fire insurance?

Murvay provided me with an example of already high fire costs. A 4,000-square-foot Aliso Viejo home was quoted at $5,000 per year for a buyer with no previous insurance claims. That’s a $417 monthly cost. Say the rate goes up 25%. The payment then jumps to $6,250 annually or $521 monthly.

Where are rates and prices going to be two years or five years from now?

Except for calculating certain 30-year mortgages with adjustable-rate components, lenders qualify you and make credit decisions based on the here and now.

It would be wise to do some worst-case projections about future finances in order to decide if you can really afford the insurance for the home you are considering.

And don’t stop with insurance. What about your job? Do you think your income is going to keep up with the general inflation rate? Is your job and industry stable?

Are you newly married and planning on having children? Is one of you going to stay home from work permanently? How are you going to replace that lost income and still afford the new digs? Or will you need to decide where you’ll get the funds to pay for childcare?

Murvay explained that some insurance carriers run a CLUE (Comprehensive Loss Underwriting Exchange) report on homebuyers with respect to a prior address. “This can play an adverse role, especially water claims,” said Murvay, leading to policy denials.

From my own experience with mortgage clients, buyers are going to pay more if they are looking in an area deemed high fire risk by the insurance industry or according to state fire marshal map.

No matter if you’re a house hunter or a homeowner, be sure to give insurance inflation rates the important budget considerations they deserve.

Hoping you can continue to afford is not a strategy or answer. If you can’t afford it, buy something cheaper. If you can afford to keep your current home, think about an exit strategy before you run out of money.

Freddie Mac rate news: The 30-year fixed rate averaged 7.57%, 8 basis points higher than last week. The 15-year fixed rate averaged 6.89%, 11 basis points higher than last week.

The Mortgage Bankers Association reported a .6% mortgage application increase compared to last week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $320 less than this week’s payment of $5,113.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 6.75%, a 15-year conventional at 6.625%, a 30-year conventional at 7.25%, a 15-year conventional high balance at 7.5% ($726,201 to $1,089,300), a 30-year high balance conventional at 7.875% and a jumbo 30-year fixed at 7.375%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.

Eye catcher loan program of the week: A 30-year adjustable, interest-only and fixed for the first five years, rate at 7.5% with 1 point cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.

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Jeff Lazerson - Mortgage Columnist since 2011