[quote=AN]
Now I get where you’re going with this. Lets assume that you buy the insurance and w/in a year, there’s an earthquake that total your house. You have an option of paying $46k to rebuild your $300k house, or spend $60k to buy another house. I still think $46k < $60k. However, if you down less than 20%, then it would be better to just walk away. Then in that scenario, you're right, there's no point in buying insurance. Every year that you pay into your mortgage your principle goes down, which give you more incentive to get insurance, right?
Lets say you won't experience an earthquake that total your house for 10 years, you would have paid $10k in premium + $45k to rebuild (assuming cost to rebuild doesn't go up in 10 years). So, if you rebuild, you're still only out $55k. However, if you walk away, you're out $108k you've put into your house ($60k in down payment and $48k in principle) + $60k (20% down on an equivalent house, assuming housing doesn't go up in 10 years).
Besides the scenario where your down payment of a new house is less than to cost of rebuilding your current house + the yearly premium, can you give me a scenario where it would make more sense to not get earthquake insurance? In the scenario you gave in your last post, $60k is still greater than $45k. Also, if I'm not mistaken, you don't have to rebuild to the exact quality. So, lets say you're covered for $300k and your house get totaled. They pay you $255k to rebuild your house. You can rebuild your house up to $255k and not have to spend a single penny out of pocket. Right?[/quote]
Right. I think when the equity goes up, it tilts toward buying earthquake insurance. Similarly, if the majority of your wealth is tied to the house, it is probably worthwhile to buy the earthquake insurance as well, regardless of the probability. And if you are certain that the big earthquake will happen, it is worthwhile to buy insurance as well (hence your comparison between 60K and 45K is valid).
The scenario that I can give you is when it has no or small damage. Not all houses collapses in an earthquake. There are many houses that still stand after 1994 Northridge earthquake, that are within miles of the earthquake center. The total property damage from the Northridge is less than $20 billions...compared to trillions of dollar of real estate in California.
