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I've been keeping the mortgage on my house, even though I have the savings to pay it off, because it's at 3.8% and my investments are expected to return at least twice that.

However: I'm in a flood-insurance-required zone, and the insurance cost has just spiked to $3400/year -- two of my my monthly mortgage payments. This has me wondering whether it might make sense to pay off the mortgage and self-insure vs. flood risk. (I am in the 100-year-flood zone, but my sump pump kept up with infiltration OK during the 50-year flood a few years ago.)

It being Monday morning, I'm not yet awake enough to have thought this thru coherently. So if anyone's got suggestions for how to reasonably model this i'd welcome input.

Edit: Granting that this was probably a bad idea, I think it may still be worth illustrating how flood insurance -- or neighborhood/condo association fees, or other recurring costs -- factors into real cost of housing. In my case, i have specific reasons for being in this neighborhood, though not necessarily this house (others are outside the 100-year contour). If someone was shopping now, is there a good principled way to figure how much more i could have spent on a house without this risk -- or equivalently how much discount to look for to break even?

Edit: The federal flood insurance program is now willing to insure for a smaller percentage of my property's value, and some banks (including mine) are willing to consider accepting that as long as the insurance at least covers you mortgage's remaining balance. Yet another option to be considered. And, yeah, most of the value of my place is in the land.

EDIT: It may also be worth talking to your insurance agent, and bank, about the alternative of private flood insurance rather than the federal flood insurance program. My rate had gone up considerably since I first posted this question; moving to a private insurer knocked about 2/3 off my yearly premium. I'm explicitly not citing the company since I don't have enough experience with them to have any opinion on whether this was a good idea or not, or what an given bank would think about them; I'm just pointing this out as another possible option to investigate.

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  • To be clear, that's $3400 per MONTH for flood insurance???
    – ChrisInEdmonton
    Commented Jul 13, 2015 at 16:16
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    Oh, thanks. Sorry for my confusion, I normally see home expenses listed on a monthly basis. :)
    – ChrisInEdmonton
    Commented Jul 13, 2015 at 18:17
  • Certainly understood; I just pay this in lump sum rather than burying it in the mortgage payment.
    – keshlam
    Commented Jul 13, 2015 at 18:41
  • How much of the value of the property is in the house itself, and how much in the land, and how does the flood insurance amount reflect that? I'm in a similar situation: my place would go for something upwards of $300K in the present market, but I could replace the house for under $100K. Even so, I had to keep FI for the outstanding balance of the mortgage. Luckily, that's finally getting down to about the house cost.
    – jamesqf
    Commented Jul 13, 2015 at 18:53
  • @jamesqf: Not sure; lemme dig out the appraisal. My ratio's probably similar; 1400-sq-ft late-1800's on ~40'x80' lot, inner suburbia with good public transit. Sounds like this thought should turn into an alternative answer?
    – keshlam
    Commented Jul 13, 2015 at 19:00

3 Answers 3

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We recently had a sump pump fail during a rainy weekend. Never had more than an inch or so of water on the floor. Total cost to remove the water, dry out the basement, and repair the damage to the paneling and wallboard: more than $7,000 plus the new sump pump. We are not in a flood zone.

In a flood zone the cost of the loss could be total. A flood is also the type of hazard that can also destroy the value of land.

No way I would want to self insure for this known hazard.

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  • Hm. Good reminder when I get around to insulating the basement, to start the wallboard an inch or three up from the floor of the low section. And maybe to sacrifice a few inches of headroom to do a raised floor.
    – keshlam
    Commented Jul 13, 2015 at 18:45
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Self-insure a $250K+ house that's deemed to be in a flood zone? Wake up, have coffee. If you don't change your mind, have another cup.

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  • Bank of a small stream, admittedly in what was the malarial-swamps end of town back when the house was built, and with recent construction upstream having reduced ground absorption somewhat.... the per-year risk isn't as high as in many parts of the country, but I grant it isn't trivial. Unfinished bmt, though I do have workshop down there. Normally not more than a trickle aftef heavy rain (bulkhead enclosure & joint betw old & new foundation), but the 50-year flood did have me pumping out about 8g/min.
    – keshlam
    Commented Jul 13, 2015 at 17:54
  • And a flood/heavy rain can easily bring a power outage. I wouldn't want to roll the dice on this.
    – JTP - Apologise to Monica ♦
    Commented Jul 13, 2015 at 21:33
  • I definitely should think about backup plans such as a venturi pump or a minimal generator, agreed. Or both. ... And gods only know what climate change will do to ground-water levels.
    – keshlam
    Commented Jul 13, 2015 at 22:52
  • BTW, there are backup pumps that operate on the Venturi principle, powered by your water line's pressure. If you're on municipal water that makes powering your backup the town's problem, and unless you're someplace where that could wash out it's pretty darned reliable.
    – keshlam
    Commented Dec 1, 2015 at 23:55
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Just so folks know what the resolution was: My insurance broker was able to find private flood insurance from a reputable company at about 1/3 the price of the government-backed programs. Since I'm not in a place where an entire town is going to submit claims at once and wipe out the insurance company (not this decade, at least), I'm declaring that a Good Enough answer for now.

I don't know whether my mortgage bank would have accepted this alternative -- but as mentioned above I'm paid off now so that no longer matters.

(Note that most agents will not make the effort to find you cheaper insurance until you tell them that you're shopping around and you think someone else is going to offer a better deal. Their incentives run the other way.)

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