When you choose to refinance your mortgage, you’re essentially paying off your old loan using the new loan (the refinanced mortgage) in order to obtain better terms and a lower interest rate. Overall, a mortgage refinance can save you money long term and may even help you to reach the goal of paying off your home sooner. Of course, the process of refinancing your home isn’t simple and comes with a few unexpected twists, especially in the realm of homeowners insurance.
When refinancing your home, the lender will have an interest in protecting the financed property, which means you’ll need to get property or hazard insurance in place to cover losses if your home is damaged in a flood, fire, or event.
Why Is Homeowners Insurance Required When Refinancing Your Mortgage?
Just like when you initially bought your home and had to acquire homeowners insurance to obtain the loan, you will have to choose a homeowners policy when refinancing. Odds are, when you first closed on your house, you paid your homeowners premiums upfront. After that, the premiums were probably rolled into an escrow account and tacked onto your monthly mortgage premium. Easy peasy. Now, while in the process of refinancing, you may be wondering if you need to do anything about your homeowners insurance at all. The answer is a resounding “yes!”
In order for you to obtain a new loan on your home, the new lender must go about the process of underwriting your loan. During the process of going over documentation, the new lender will need to see that you have an active homeowners insurance policy in place. Not only do you need to have homeowners insurance, but the new lender will want to see that they are listed as the mortgagee on the new policy, rather than your old lender. At this point, your old lender will receive notice that they have been removed from the policy as the mortgagee.
What Kind of Coverage Do Lenders Require?
Just as your old lender likely required a policy that could cover up to 80 percent replacement value on your home, your new lender during the refinancing policy will want much of the same. Most homeowners policies are known as HO-3 policies. These policies protect your home and personal belongings against fires, accidents, theft, and natural disasters. Keep in mind, most standard policies will not protect from floods or earthquakes, though you may tack that coverage on for an additional price. Different lenders do require different things. Your new lender may have laxer or more stringent requirements. For example, if you live in a flood zone, your new lender may require that you take on separate flood insurance. The goal is for your lender to feel as if the investment is protected in the event of a disaster or issue.
Keep in mind that whatever policy you do choose, it should be enough to cover the costs of completely rebuilding or furnishing your home. Personal belongings and the quality of appliances, flooring, and fixtures should also be taken into account. Note any unique details of your home such as expensive moldings and add those costs into your estimate. As mentioned above, speak directly to your lender during the refinancing process to ascertain that you are getting adequate coverage for loan approval. Typically, the amount must be at the very minimum, enough to cover the total loan amount. However, the goal should be to cover the cost of replacement on a whole.
When Do You Need To Purchase Homeowners When Refinancing Your Mortgage?
Unfortunately, there is no one-size-fits-all response as the answer generally varies by lender. Some lenders will wait until the refinancing process is nearly wrapped up and then require you to get insurance in place. Others will issue a loan commitment that is contingent on having insurance in place by naming the lender as the mortgagee right away. Generally, it depends on the loan itself. The process of obtaining insurance should be listed in your refinancing packet or directly conveyed through your agent. You will know right away if your loan is only being held up due to the issue of homeowners insurance.
When Refinancing, Do I Need To Keep The Same Homeowners Company?
While in the process of refinancing your home, you may be wondering whether or not you need to stick with the homeowners insurance company you used on your previous loan. Luckily, the answer is no. When it comes to insurance, the ball is in your court. There is no need to be loyal to your previous homeowners insurance company. In fact, refinancing can be a great reason to reassess and find a company that might work better for you.
Most homeowners fall into the trap of just going with the motions, especially during an already stressful refinancing experience. However, choosing to branch out to different insurance companies could potentially save you hundreds of dollars. While refinancing, reach out to agents from several different companies. You can also go with an independent agent who works with a myriad of insurance companies. Compare and contrast policy coverage options as well as monthly premiums. Is one company going to give you better coverage for a lower price? How about more robust coverage for the same price you’re paying now? These are all things to consider.
There is no contractual obligation for you to stick with a certain insurance company while refinancing your home. If you’re going to save a bit of money on your home loan, it wouldn’t hurt to extend those savings to your insurance policy as well. When it comes to homeowners insurance and refinancing your mortgage, you can choose any insurer you’d like, so long as the coverage is in line with your lender’s requirements.
