The Home Discount Calculator suggests how much a home’s price should be adjusted based on its associated flood insurance premium. Consider a home buyer looking at two homes that are essentially the same in every way except for a significant difference in flood insurance costs. Clearly, the home with the higher flood insurance premium should be priced lower, since a new owner would have to pay an additional flood insurance cost on top of the mortgage and flood insurance cost of the first home.

With everything else being equal, the rational buyer would choose the home with the lower total annual cost of ownership. With enough rational buyers, the market will adjust the prices of the two homes until they have the same total annual costs.

We can compare home values by comparing the monthly or annual costs of ownership, but how much cheaper should the home with the higher flood insurance costs be so it is fully competitive in the market? The price difference should be the net present value of the difference in annual flood insurance premiums.

In engineering, this type of comparison falls into the topic of “engineering economics”. There are equations that allow us to easily translate from a series of annual payments to the net present value of those payments, while taking into account the “time value of money”, i.e. the “discount rate” or relevant interest rate. This is similar to how monthly mortgage premiums are determined from a current loan cost, only in reverse. In this case, we want to determine the effect a series of annual flood insurance premium payments should have on a home’s value.

For example, a $200 monthly difference in flood insurance premiums may seem minor on paper, but over a 30-year mortgage term, that gap compounds into thousands of dollars in net present value. Understanding this upfront can help buyers negotiate more effectively, avoid overpaying for a property with hidden flood insurance exposure, and make a more financially sound long-term home purchase decision.

Flood Insurance Home Discount Calculator

Click the image below to access the home discount calculator. This tool allows you to estimate the impact of higher flood insurance premiums. It determines the net present value of a series of increasing payments, where the payments are the difference in flood insurance premiums between two houses. It considers both that flood insurance rates are expected to go up at some annual growth rate, and that money in your hand today is more valuable than money guaranteed a year from now (“time value of money”).

Your anticipated mortgage interest rate probably makes the most sense to use as the discount rate, because it is the rate you are agreeing to with your bank on the time value of money over the next 30 years.

The annual cost growth rate of insurance is a different story. In theory, it should be the actual rate of growth over the next 30 years. While FEMA is currently applying an 18% cap on year-to-year increases, this rate increase is meant to provide a more gradual transition to the full actuarial rates in Risk Rating 2.0, and should not be expected to be a long-term growth rate. Your current mortgage interest rate might be a better estimate, but of course it does not take into account any worsening of flood risk and actuarial insurance rates, as a result of climate change. Still it is probably a good place to start.

Read Your Risk maps flood insurance premiums to make it easier to find a home with flood insurance costs you can live with: Sprinkles Flood Insurance Premium Estimate Maps.