When mortgage interest rates come down, many homeowners begin to consider the value of refinancing their mortgages.
If you’re thinking about refinancing to secure a lower interest rate, you may also want to review your homeowners insurance. In addition to ensuring that you have the right amount of coverage to protect your home, you may also be able to reduce your premiums.
Ensure your home is protected
What is refinancing?
Refinancing your mortgage is the process of paying off your existing mortgage, and then securing a new loan for the remaining balance. You are essentially closing the mortgage with the original interest rate, and acquiring a new mortgage at current rates.
Depending on what your objectives are, you could refinance a 30-year mortgage with a new 30-year mortgage, or you could get a new mortgage with a shorter term—like a 15-year or 20-year mortgage.
Replacing a 30-year mortgage with a new 30-year mortgage at a lower interest rate typically means lower monthly mortgage payments, but you’ll pay more in interest over time. Alternatively, changing to a shorter term will usually mean a slightly higher monthly payment, but you’ll pay less in interest over time.
Mortgage interest rates are not directly tied to the Federal Reserve’s changes, but those rates can impact mortgage rates. So, when the Federal Reserve makes interest rate cuts, mortgage rates often follow.
When should you consider refinancing your mortgage?
Because refinancing means closing out one mortgage and applying for a new one, there are fees involved, such as closing costs. You will want to make certain that you are considering these expenses if you are thinking about refinancing. So, how do you know when paying those fees to refinance makes sense?
A standard rule of thumb is to take the amount of closing costs and divide that by the projected amount that you will be saving each month. This will give you an idea of how many months it would take to recoup the costs you paid to refinance your mortgage.
For example, if you are paying $4,000 in closing costs and your new interest rate will save you $200 a month on your mortgage, it will take you 20 months to recoup the costs of refinancing your mortgage.
With those numbers in mind, if you aren’t planning on staying in your house for at least two more years, it might not make sense for you to go through the process of refinancing.
Why is homeowners insurance part of the mortgage process?
When you secure a loan, your lender is providing you with the funds to purchase your home, and your mortgage operates as the schedule to repay that loan with interest.
Because your lender is the owner of the property until you pay off your loan in full, it stands to reason that the lender wants to make sure your home is protected by insurance. That is why proof of an active homeowners insurance policy is an essential part of the mortgage loan process.
This is also why most lenders require your homeowners insurance premium to be paid through an escrow account. They do not want to risk a lapse in coverage due to late payments or nonpayment, and requiring this bill to be paid through escrow reduces this risk substantially.
And, it means that during the refinancing process is an ideal time to evaluate what you need in a homeowners insurance policy.
What are the benefits of reviewing my homeowners insurance when I refinance?
When you refinance your mortgage, you are essentially going through the same process you used when you first purchased your home. This makes it a good time to review your homeowners insurance to ensure that you have the right coverage.
Depending on how many years have passed since you purchased your home, your insurance might need some updating. For example, if you no longer have a dog and got rid of the trampoline your kids no longer use, those are two big risk factors that should be subtracted from the calculation of your premium.
On the other hand, if you’ve made substantial upgrades or added on to your house, you’ve increased the value of your property, and you’ll want your coverage to reflect those changes.
This is also a good time to review things like your deductible. Perhaps when you first purchased your home, you were just starting out at your job and didn’t have much in the way of savings, so you chose a lower deductible. Now, if you’re in a better financial position, you may wish to consider increasing your deductible, which can help to lower your premium rate.
As life changes, your insurance coverage may need to change, too.
Because your homeowners policy is designed to help you rebuild if your home is damaged or destroyed by a covered event, you may want to talk to an insurance expert about how external or economic factors might affect your coverage.
Trade, labor, and supply chain changes have impacted how much it costs to build a new home. How much these factors have impacted the residential construction industry varies by region, so talking to someone with expertise is essential. Rate Insurance’s experts can provide context and guidance, so you are purchasing the right amount of coverage to fully protect your home.
Additionally, you may be able to bundle insurance to get a better rate. The more policies you have with a single carrier, the more efficient it is for them, and that can mean a reduction in your premium.
How do I find quotes for homeowners insurance when I refinance?
If you are considering refinancing, your current insurance should remain in effect as you are going through the process, even if you ultimately decide to change insurance.
It is very important to avoid a lapse in coverage, which will require attention and some coordination. Do not cancel your old policy until your new policy is confirmed and active.
Try to shop for new insurance and get quotes early in the process, so that you aren’t scrambling for coverage as you’re trying to close on the refinance.
This can be a lot to manage during the refinancing process. If you need help, reach out to the experts at Rate Insurance. With access to more than a hundred insurance carriers, we can take the hassle out of securing quotes from top companies so that you get the coverage you need at the right price.
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