Are you considering buying or refinancing a condominium? You should know that in recent years all mortgage lenders began requiring a type of insurance coverage that was not required previously.
When you own a condominium, you do not hold title to the building structure like you would for a single family residence. Instead, what you own is limited to the interior space together with a shared interest in the common areas of the condominium.
Still, the interior space of a condominium can include fixtures, decorative finishing materials, flooring and other items that would need to be replaced in the event of a fire or other loss. What is new is that all lenders now require that a condominium owner has insurance to cover loss and damage to these interior finishing elements.
Some believe that walls in coverage is provided through the master insurance policy maintained by the homeowners’ association. However, this is rare, and in practice lenders insist to know the specific dollar amount of coverage provided which is usually not specified in the CC&Rs.
The insurance industry name for this type of insurance is HO-6. Most refer to it as “walls in” coverage. This insurance is a good idea in principle. Few homeowners would be satisfied to move into a condominium with bare sub-floors and sheet rock walls following a fire. The rub is that the amount of coverage required can be over-kill for the actual improvements that exist at a given condominium.
On a recent refinance in a two-unit building, my client had to purchase $162,000 of coverage for potential walls in damage to her home. This is a very nice unit in the Castro District that appraised for $890,000, but that amount of coverage far exceeded the realistic cost to replace the interior improvements at her home. As her insurance agent explained, the coverage required was based on a somewhat arbitrary percentage factor of the appraised value of the home. It was not based on any actual inspection or estimate of cost to replace the improvements at this particular home.
The refinance of this condominium still made good financial sense because my client will save more than $11,000 per year with a lower interest rate. Still, the added $1,162 annual insurance took a little fun out of the deal.