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Climate change is remaking the home insurance landscape. Depending on where you live, the prevalence of disastrous hurricanes, wildfires or tornadoes can make policies a lot more expensive and much harder to get. But what can you do if climate change ends up making it harder to even get a mortgage? According to a new study by First Street, a risk modeling firm that analyzed the relationship between physical climate risk and foreclosures in the U.S., that’s a real risk. In fact, just like your credit score, First Street expects that where you live will end up being an important factor in how lenders assess your creditworthiness. So it’s important to consider all aspects of your location when you’re making important life decisions. “Borrowers in areas exposed to both the direct impacts of extreme weather and the indirect pressures of shrinking insurance availability, rising premiums, and declining property values are under mounting financial strain,” First Street wrote in a May report. “This means that two borrowers with identical credit scores, histories, and incomes could face substantially different credit risk odds if one lives in a 100-year floodplain and the other does not.” First Street’s analysis showed that floods are the primary driver of disaster-related foreclosures, particularly when they’ve struck outside the areas FEMA has designated as especially vulnerable to floods. But even when there’s no extreme weather, higher insurance rates are becoming an increasing burden on homeowners, raising the risk of foreclosure, their research found. Between 2019 and 2022, for every 1% increase in annual homeowners-insurance premiums, there was a 1.05% increase in the foreclosure rate. First Street projects that if there’s severe weather, climate-related mortgage losses could reach $1.2 billion this year and escalate to $5.4 billion a year by 2035. Properties in states including Florida, Louisiana and California are particularly vulnerable. So what? Climate risks come with financial risks — including ones we may not have anticipated. For some, they’re even determining where to live. Here are a few steps you can take to safeguard your finances and credit health in the face of these evolving environmental challenges: Assess your climate risk with an online tool. Before you buy a house — or even rent — explore the environmental risks of the location. This tool, a partnership between First Street and Redfin, the real estate brokerage, scores environmental factors including wind, floods, and fire on a 1-10 scale. Consider flood insurance. First Street’s modeling shows 17.7 million properties around the country face at least a 1-in-100 annual flood risk. Of those, about 9.8 million are likely unaware of their flood exposure because they fall outside of FEMA’s Special Flood Hazard Areas, according to the researchers. Flood damage isn’t covered in standard home insurance policies, so if you want protection, you need to buy separate coverage from the National Flood Insurance Program or a private insurer that offers flood policies. Plan for rising insurance costs (and consider them before you move.) The average annual premium on a standard home insurance policy shot up 62% between 2018 and 2024, according to a Freddie Mac analysis. While shopping around may help lower your costs, you’ll want to budget for more increases. Plus, premiums can be four or five times higher in some states, becoming a big factor in your monthly housing payment.Related Reading
• Jerome Powell Quietly Warned There'd Be Places in the US Where You ‘Can’t Get a Mortgage’ — and He’s Not Wrong (Moneywise)
• How Climate Change Could Make Your Home Harder to Insure (NerdWallet)
• Choosing a Home with Climate Change in Mind (National Resources Defense Council)
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