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Saturday, July 16, 2005 - Page updated at 12:00 AM

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Home Forum

Better have deep pockets if condo unit is uninsured

Seattle Times staff reporter

Q: Can a condominium board require unit owners to carry homeowners insurance? If not, what alternatives exist to encourage owners to assume financial responsibility for the kind of problems insurance would cover?

A: Buyers of detached homes must carry homeowners insurance if they have a mortgage. Lenders require it. However, there's no such requirement for individual condo buyers, according to Barb Huber-Read, a loan officer in Golf Savings Bank's Mountlake Terrace branch.

Instead, condo buyers need only show their lender proof that the condominium association has insurance coverage, called a master policy.

Insurance agent John McDonald of McDonald McGarry Insurance in Edmonds said the master policy will cover repairs to common areas, such as the roof, but generally does not cover the interior of an owner's unit. Nor does it extend to an individual homeowner's belongings.

Here's why this issue is important:

Say there's a fire in a unit. Damage to the kitchen cabinets, interior doors, water heater, appliances or carpeting, for example, generally is the financial responsibility of the owner.

Thus, an owner who doesn't have an individual homeowner's policy had better have deep pockets.

Your first line of defense, said Seattle attorney William Willard, is owner education.

"The board should advise the unit owners that the condo's own insurance won't cover the unit's interior and possessions," Willard said. "Unit owners are frequently confused about that."

Beyond that, the association can amend its governing documents to require owners to carry their own insurance. The problem with that is enforcement, which can be time consuming.

So another approach is to do an amendment that makes an "uninsured loss" the responsibility of the unit owner where the problem began.

For example, say an upper-floor owner's water heater fails, flooding the unit below. This is a common problem.

The association's master policy will cover much of the damage, minus its deductible, which can be sizable — $10,000, for example.

That portion is the "uninsured loss." It becomes the responsibility of the water heater's owner.

If that owner has homeowners insurance, it will pay the deductible and possibly other costs. Otherwise the owner will have to cough up cash.

Some associations also require inspections or routine replacement of interior fixtures that can wear out and cause damage to common areas or adjoining units. Again, water heaters are high on that list.

Q: I'm buying a house and getting a 30-year, interest-only mortgage. I'm sure the loan officer said I'd pay only interest for the first 10 years, then only principal for the next 20. A friend says this is not the way interest-only mortgages work. Who's right?

A: "When in doubt, always put yourself in the lender's shoes," suggested Keith Gumbinger, vice president of HSH Associates, a New Jersey mortgage-information firm. "No mortgage lender in his right mind would let you have money interest-free for 20 years."

What you probably have is a fixed-rate loan, called a 10/20, that requires you to pay interest only for the 10 years. After that you pay both interest and principal, but instead of having 30 years to repay the principal, you have only 20.

These mortgages are growing in popularity because their lower initial payments help offset high home prices.

"But the question is, what does that flexibility actually cost you over the time you're in your home?" Gumbinger asked.

He ran some numbers to find out. They're based on a $200,000 mortgage at prevailing rates.

For a 30-year fixed rate, Gumbinger used 5.75 percent. Interest-only loans are about a quarter point higher, he said, so he used 6 percent for it.

Initial monthly payments on the interest-only loan would be $1,000, while the standard 30-year note would be a constant $1,167.

The $167 a month savings would be wiped out — and then some — when the interest-only loan readjusts to $1,433 a month for the final 20 years.

Keep the interest-only loan the full 30 years, and the interest will total $263,886. That's $43,000 more than the traditional loan.

Conceding that most borrowers don't plan to stay in their home a full 30 years, Gumbinger ran the numbers for just 10 years.

After a decade, the interest-only borrower would have paid nothing toward principal and $120,000 in interest.

Meanwhile the traditional loan have tallied $106,298 in interest payments and reduced the principal to $166,240.

"For that $167 a month flexibility today, you'll spend — over 10 years — $13,700 more in interest and give up almost $34,000 in equity," said Gumbinger.

His take on all this: "Renting your mortgage money for 10 years is not a path to riches."

Q: We've recently moved into a small condo community and are trying to form the association and set up the rules. We're inexperienced, trying to do this correctly, and really need some assistance. Can you repeat the address of a Web site that has forms and information about this?

A: You're probably referring to Community Associations Institute, a nonprofit homeowner-association educational organization. It's national and has a King County chapter. Go to www.caionline.org for information about both.

Your association's governing documents must conform to state law and be carefully crafted so that they meet your needs and have no unintended consequences. Thus they're not good candidates for a do-it-yourself approach. In the long run, consulting with a condominium attorney now can save you time, headaches — and potentially money.

Home Forum answers readers' real-estate questions. Send questions to Home Forum, Seattle Times, P.O. Box 1845, Seattle, WA 98111, or call 206-464-8510 to leave a question on a recorded line. The e-mail address is erhodes@seattletimes.com. Sorry, no personal replies. More columns at www.seattletimes.com/columnists.

Copyright © 2005 The Seattle Times Company

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