Refinancing your mortgage doesn’t usually change your homeowner’s insurance costs directly, but it can reveal things that might. For example, if you’ve made major improvements — like a kitchen remodel or room addition — your insurer may need to update your coverage to reflect the higher cost to rebuild.
Lenders will verify that your coverage is adequate before approving the refinance, and in some cases, you may need to increase your policy limits to meet their requirements. That could lead to a higher premium, so it’s a good idea to review your coverage and shop around if needed.
When you refinance your home, your new lender will verify that you have adequate homeowners insurance in place to protect the property, just like your original lender did when you first took out the mortgage.
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.
Related: What Documents Do You Need to Refinance?
Issuing a New Insurance Binder
Your lender will review the declarations page and, as part of the refinance process, contact your insurance agent to obtain a new binder with updated mortgage information. The binder is a temporary policy that will be 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 typically last 30 days, though the duration can vary by insurer. If there are delays in your refinance, you may need to request a new temporary binder.
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 previous loan didn’t include insurance in escrow, refinancing may change that. Once you enter escrow, your insurance premium is included in your monthly mortgage payment, and your lender handles the payments directly with the insurer.
What Kind of Coverage is Required?
Lenders usually require homeowners’ insurance coverage that is equal to the replacement cost of the home or at least sufficient to cover the full loan amount, whichever is higher. Most policies are classified as HO-3 coverage, which covers your house and personal property from damage caused by fire, accidents, theft, and natural disasters.
Most regular policies do not cover floods and earthquakes. You can add those coverages for an additional 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 what a lender requires.
Also, you don’t need to use the same homeowners insurance provider that covered your previous loan. This can be a time to 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.
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 pattern of claims that could result in significant costs for the insurer.
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 refinance may involve credit inquiries, but these typically have little or no direct effect on your credit-based insurance score. What matters more is your overall credit behavior, like payment history and outstanding debt. 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 can’t control every factor that goes into your credit-based insurance score, improving your overall financial health — like paying down debt and building savings — can help boost both your insurance and credit scores over time.
Ready to Refinance?
Refinancing your mortgage can be a smart move — especially when you understand how each piece, including your homeowners insurance, fits into the process. By reviewing your coverage, checking your credit, and gathering the right documentation, you’ll be in a great position to move forward.
When you’re ready to take the next step, Refi.com makes it easy to get started.
