What happens to residential real estate in earthquake disaster areas? Like Kobe (1995) or recent quakes in New Zealand or Japan (again)? Is it worse than what has happened with the US housing bubble? Foreclosures rampant in damaged areas, that sort of thing?
I ask because I'm struggling mentally with the question of paying off all or most of our mortgage. It's the question of staying liquid or sinking more cash into a risky, illiquid asset.
A few things are bugging me: one, our house is in the SF Bay Area and might be damaged, a little or a lot, in the next big quake (could happen this afternoon, could happen in 30 years). If the house is a total loss and the land loses value, recent events show that simply walking away from an underwater mortgage might be a financially wise thing to do. Earthquake insurance has never seemed like a good deal (too high a deductible), so we don't have any.
Two, I keep on thinking inflation is going to kick in big time, and that means paying back the loan with cheaper dollars and getting higher return on cash savings.
Three, we are in our mid-late fifties, working full & part-time, kids in their twenties and still boomeranging, and one of us wants to downsize out of this house in the next few years (sell or turn it into a rental), while the other does not currently share this desire.
The mortgage is a $200K loan balance with 14 years left at 4.875%, so monthly interest is a little less than $800. This is not all tax deductible since our itemized deduction is not much more than standard these days. We have about 55% equity in the house at current market (which may still go down another 5-10%), and an unused $40K equity credit line which is currently at something like 3.5%.
There is some inheritance money and other cash savings which could be used to pay off the mortgage in full, or to pay off $160K and pay off the remainder with the equity line (which requires a balloon payment in a few years, unless the bank agrees to extend it). We also have about $400K pre-tax retirement money all in the stock market, and enough extra cash and Roth money to allow for a generous emergency fund. Of course, this same money could be thrown into the stock market instead, right now it's earning very little interest.
My mental struggle makes me think I'm maybe being irrational about the benefit of staying liquid as a hedge against earthquakes, inflation, and the other factors above. Any way to boil this down to a more objective calculation? Thank you, and sorry for the long story.