Homeowner’s Insurance and Your Refinance: What You Need To Know

Posted by Chris on January 21, 2016

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When you purchased your home, it’s likely you had a real estate agent holding your hand throughout the process - helping you navigate things like home insurance, closing costs, inspections, appraisals and more. But, as you prepare to refinance, you’re likely doing it alone. It’s normal to have questions about these things.

Whether you’ve already started your refinance or are considering your options, learning what will be expected of you is important. Below, we’ll dive into the expectations for homeowner’s insurance, and what you’ll need to think about when it comes time to complete the refinance process.

Homeowner’s Insurance

As you know from your home purchase, having valid homeowner’s coverage on your home is required by a lender when you’re looking to obtain a mortgage.

At the initial closing when the home was purchased, the lender required the first year of the homeowner’s premium to be paid up front. The following year’s payment was most likely rolled into your escrow account and made a part of your monthly payment amount.

But now you’re thinking of refinancing your home and you’re not sure if you need to do anything additional let alone what you should know.

Find Out What the Lender Requires

The most common homeowner’s insurance policy is known commonly has an HO-3 policy. It will protect your home and its contents against fire, accidents, theft, or other disasters such as fallen trees. However, a standard policy won’t protect you from floods or earthquakes.

It’s important to discuss with your lender what they will require for coverage. If you’re located within a flood zone, most lenders will require something called flood insurance.

Even if you’ve lived in the home for 30 years and there’s never, ever been a flood, but you’re still in the flood zone, they’re going to want coverage. For more information on flood insurance, FEMA offers a lot of information on disaster relief and how to protect yourself. You can also check to see if your home is in flood risk by checking floodsmart.gov.

How Much Coverage Do you Need?

Your homeowner’s insurance policy should cover the cost to completely rebuild and furnish your home. The estimated cost should take into consideration any unique features or details that are not customary. These additional costs should be added into the estimate.

Speak with your lender to ensure your policy covers the amount required by the bank to obtain and approve your loan. Usually, this amount must be at minimum, enough to cover the loan amount, however, should cover the cost to replace the home and its contents.

Now Is the Time To Shop

If you’re close to pulling the trigger on refinancing your home, it wouldn’t be a bad idea to shop around for your insurance premium. A common mistake homeowners make is keeping the same insurance company due to loyalty.

Hundreds, even thousands, of dollars can be saved over the life of the loan by just having a chat with your agent to make sure you have proper coverage and you don’t have more than you need. Especially in cases where you’ve noticed an increase in your premium year after year.

Try speaking with an agency that writes for several companies. For example, if you use a company like State Farm Insurance, they can only quote you State Farm rates. State Farm would be an example of a captive agent. There’s not a lot of wiggle room to find out if it’s the best and most affordable policy for you.

An alternative would be going through an independent insurance agent. These agents can sell policies from several different companies and can help you find the best package that fits both your needs and the requirements of your lender.

If you prefer to stay with your current agent, there’s nothing wrong with that at all. In fact, we like your loyalty. However, this doesn’t mean you should pay more. Ring your agent and ask if there’s anything they can do to help lower your insurance premium.

Are there options to bundle several policies? Can you increase your deductible? Maybe your agent has your house valued 20-30% higher than the actual value. Hey! There’s no harm in asking, right? The worst thing that could happen is that they aren’t able to lower your current premium and you’re right back where you started.

Remember that refinancing your home means paying off your current mortgage and replacing it with a new one. You’ll have a new escrow account, most likely a new servicer, and new payment. If you’ve been thinking of switching your insurance agent or making adjustments to your current plan, make sure you’re taking the time to review your options.

This way, when you’re ready to close your refinance, everything will be in order and you don’t have to switch companies randomly, which can be a pain.

If you think you’re ready to refinance your home and you’re unsure where to start, make contact with us at Lenda.com. We can tell you what’s needed to ensure you have proper coverage for your home and how we can help get you closed quickly.

Choosing to partner with Lenda means you have someone to reach out to with questions or concerns. To help, we’ve included some articles to help during your refinance process: Mistakes That Can Kill Your Refi and How to Prepare to Refinance Your Mortgage.

Of course, if you have specific questions regarding the refinance process or how we can help, reach out to one of our agents for more information. We’re glad you decided to take the steps and we’re excited to help you along the journey!

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Topics: Refinancing 101