Review Your Homeowners Insurance before You Refinance Your Home
Insurance Professionals of Arizona | June 2nd, 2020
With incredibly low interest rates right now, it’s no surprise that a lot of people are refinancing their homes. At the beginning of April, refinances made up 76.2% of total mortgage applications. It’s a great time to refinance into a lower payment. If you’re seeking to save money on your mortgage, don’t forget to look at your homeowner’s insurance, too.
Many homeowners first obtain homeowners insurance when they buy their home, and rarely look at their policy again. But a lot can change over the years, and why not take this opportunity to see if you could further improve your finances during your refinance?
Shop Around and Get Quotes
Don’t just roll over your existing insurance policy when you close on your refinance. Now is the time to shop around and get quotes.
Insurers base premiums in part upon risk factors that change over time. If you had a lower credit score a few years ago, you would have paid higher premiums. But what about now? If your score has improved, the same policy could cost you less with a different insurer.
Crime rates could have gone down in your neighborhood, or a new fire department opened a few blocks away. These would lower your risk, and thus your insurance premiums. If you’re refinancing your home, check if anything that impacts your homeowner’s insurance has changed positively since the last time you reviewed your policy.
If the thought of entering your information into several different insurer’s websites to get quotes doesn’t appeal, use an insurance agent. Agents partner with many insurers so that they can find the best policy for you – saving you the time and hassle of approaching each company on your own. When comparing policies, look at the total policy; coverage limits, deductibles, and premiums.
Review Your Coverage
While you might be refinancing to take advantage of lower interest rates, another reason to refinance is to get equity out of your home. If it’s been several years since you’ve bought, or you’ve made significant improvements, your house could have increased substantially in value. Does your insurance cover those improvements?
Homeowners insurance typically covers damage or destruction of your primary residence and could include any outbuildings such as a garage or shed. Your policy spells out covered events – such as a fire – and exclusions – such as floods or an earthquake. Often, you’ll need to purchase additional coverage for common exclusions.
It also lays out the amounts that the insurer will pay out if your home is damaged or destroyed under a covered event. A payout can be for either the replacement cost or the actual cost.
Replacement Cost
If your home burned to the ground tomorrow, a homeowners insurance policy with replacement cost coverage would pay to fully replace everything the policy covered. Even if your refrigerator was ten years old, your insurance company would buy you a new one (minus any deductible). The item’s age or condition doesn’t matter.
Replacement cost pays to fully replace anything destroyed in a covered incident at current market prices. If you’ve remodeled your kitchen or built a new garage, you’ve invested significant money into your property. Replacement cost coverage protects that investment.
However, because this policy gives you such comprehensive coverage, premiums will be higher.
Actual Cost
Policies that provide for actual cost replacement have lower premiums, but they’ll pay out less if anything happens. That’s because they only cover the depreciated cost of the item, or its value at the time the event occurred.
If you lose your ten-year-old refrigerator, the insurer will cover the item’s original cost of less than ten years of depreciation. It likely won’t be enough to buy a new fridge. While a policy with actual cost coverage is cheaper, it can cost you in the long run.
During a refinance, review your policy to make sure that it has sufficient coverage to meet your needs in case of disaster. This includes not only replacing valuable items or giving you the money to buy a new house but also paying for a hotel or short-term housing in the interim (loss of use coverage).
Saving money is great, but if your policy doesn’t adequately protect your home, it could cost you down the road. Smart homeowners strive to find the balance between affordable premiums and adequate coverage. If you’re unsure about your coverage needs, talk to your insurance agent. Insurance needs can be quite personal, and you’ll want to work with someone who understands your situation.
Consider Your Deductible
When you first bought your home, you might have chosen a smaller deductible. After watching your down payment go out of your savings account, you might have worried that you couldn’t cover several thousand dollar deductibles. But lower deductibles equal higher premiums because the insurer would be on the hook for more if something happened.
If your refinance will put some money in your pocket, consider saving it so you could afford a higher deductible. Or maybe you’ve received several raises since buying your home and a higher deductible wouldn’t be an issue. Raising your deductible – which you might never have to pay – will lower your premiums.
Ask About Discounts
Loyalty discounts, bundling, claims-free – insurers frequently offer discounts to customers, but sometimes you have to ask about them.
Some homeowners insurance companies lower your premiums if you go claims-free for a certain number of years. Others discount them if you remain a customer for a longer time. Pick up the phone and ask your insurer if you’re eligible for any of these discounts.
Bundling policies is the most common discount offered by insurers. They offer it to capture more of your business. With bundling, if you combine your homeowners and auto insurance with the same insurer, you pay a lower price for them than you would individually. Did you buy a new car last year? Maybe your teenager just started driving? Having your policies with the same company that covers your home could save you money.
