Table of Contents
Refinancing a mortgage can reduce monthly payments and help a homeowner build equity quicker.
However, when a mortgage is refinanced, the lender must reassess the home’s value. That could impact if your home value has gone up significantly or if you’ve made home improvements that have added value to your home’s bottom line.
Based on that information, the value could be higher or lower, which could directly impact the cost of your homeowners’ insurance.
Refinancing makes a lot of sense if your finances have changed or lenders will give you a lower interest rate than your current mortgage, but you must consider the possibility of added costs for homeowners insurance to get an accurate comparison of your net gains.
In all cases, when you refinance your house, the lender will insist on protecting the financed property through an insurance policy to protect against floods, fires, or other natural disasters.
A mortgage refinance may have some negative consequences, and you need to be clear about those potential pitfalls before starting the process.
How to Deal with Homeowners Insurance in a Refinance
Get Your Declarations Page
Lenders require proof of insurance in a refinance to protect their investment in your home. When you apply to refinance your home, you must contact your insurance agent and have them send you a copy of the policy declaration page.
This summarizes your current policy and clearly states coverages, limits, deductibles, premium amounts, and the policy term.
Issuing a New Insurance Binder
Your lender will review the declarations page, and as part of the refinance, they will contact your insurance agent to get a new binder with updated mortgage information. The binder is a temporary policy put in place pending the issuance of a new permanent policy.
If the lender determines that the binder provides adequate coverage to protect their risk, you are one step closer to a refinance approval.
Binders only last 30 days, and if there are any delays in other parts of your refinance, you may need to secure new temporary binders more than once.
Formalizing Your Amended Policy
After your new mortgage is approved, your insurance agent will formalize your amended policy. Updated mortgage information, effective dates, and new premium costs will be locked in.
Your new lender wants proof that their name is listed as the mortgagee on the new policy. At this stage, your old lender will be notified that they have been dropped as a mortgagee on the policy.
Mortgage lenders require clients to enter escrow for the refinance, including your mortgage payment and insurance payment being lumped together as part of the new loan. If your insurance payment was not part of escrow with your previous loan when you enter escrow, you won’t pay your insurance company every month since your premium has been factored into your mortgage payment.
What Kind of Coverage is Required?
Lenders usually require coverage up to 80% of the replacement value of your house. Most policies are classified as HO-3 coverage, which covers your house and personal property from damage caused by fire, accidents, theft, and natural catastrophes.
Most regular policies do not cover floods and earthquakes. You can add those coverages for an added fee. In cases where you live in a flood zone, the lender may require a separate flood insurance policy to fully protect their mortgage investment.
Coverage should be sufficient to cover the costs of rebuilding or furnishing your home completely, taking into account the value of your personal belongings and the quality of fixtures and appliances. Factor those things in when shopping for coverage.
Your best bet is to talk with an experienced agent who can guide you to the right coverages you want and a lender requires.
Also, you don’t need to use the same homeowners insurance provider that covered your previous loan. This is a time to aggressively shop for a better deal and find a company that may better fit your situation.
Many people use independent agents representing several providers to get a side-by-side comparison easily. You could save hundreds of dollars in the process, offsetting costs if the appraised value of your refinanced home goes up.
» MORE: See today’s refinance rates
What to Know About Your Credit-based Insurance Score
Your credit-based insurance score is similar to your FICO score, which is a number that lenders use to predict how reliable you are when paying back your debts. Insurance companies use it, in part, to predict whether you will file a slew of claims that will cost the insurer a lot of money.
When an insurer needs to price your prospective policy, the underwriter will review your credit-based insurance score and the information in your application or policy, claims history, driving record, FICO score, and property reports. All of these items give the insurer some insight into your level of risk as a customer to insure.
If you’re deemed low-risk, you get a high score. If you’re considered high-risk, you get a low score. Since more claims mean greater losses for the insurer, a low credit-based insurance score generally results in a higher insurance premium for you.
A mortgage refinance looks at credit inquiries and new account openings, which could pull your credit-based insurance score down. But these actions alone wouldn’t normally affect the cost of your insurance dramatically.
However, there may be a more pronounced effect if you’re refinancing due to financial problems, such as funding a cash-out refinance to consolidate several maxed-out credit cards.
While you may be interested in managing your credit-based insurance score, it’s probably unnecessary. You’re better off strengthening your financial position by paying down debt and increasing your savings.
When you pursue those two goals, your credit-based insurance score and FICO number will respond favorably.