Complications with Refinancing and Your Insurance

With record low interest rates, many homeowners are looking to refinance.  This is a great way to lower your monthly expenses, but there are some issues that should be considered in regards to a new mortgagee and your homeowners insurance.  Otherwise your savings could quickly disappear.

"Why do I suddenly need flood insurance?"

When you change mortgage holders, you are subject to their requirements.  This may include adhering to flood map updates that were been done by the Federal Emergency Management Agency (FEMA) in recent years.  Your current mortgagee may not have caught up with the updated flood maps, so residents that were once not considered in a high-risk flood zone, now may find themselves mapped into one.  If this is the case, the new mortgage holder will most likely require you to get a flood insurance policy.

This surprise does cause frustration for homeowners.  To get an idea of a flood insurance premium you will need to know your flood zone and then go to FEMA's premium example page, as it is FEMA that sets the rates.

One way to lower the premium is if you have an elevation certificate from an engineer who surveys your specific lot.  The survey may prove that your property's elevation is higher than originally mapped which can make a big difference in the premium.

This situation recently happened to a Holt Proctor McBriarty Insurance Agency client who lives in New Hampshire.   The original flood quote provided was $1081 for the year.  The client decided to invest in a survey and proved that the home's elevation was much higher than originally indicated on the flood map.  The annual premium was reduced to $221 a year.  However there is no guarantee that there will be a reduction in premium as it would have to be justified in the elevation certificate.

For more information about NH Flood Insurance, please go to the HPM Insurance research center.

"Why does the mortgagee want me to change my coverage?”

Besides the homeowner, there are at least two other parties looking at how much coverage you have on your insurance:

1. The mortgage holder: They want to ensure your dwelling coverage is equal to or greater than the mortgage amount.

2. The insurance company: They want to insure your home for the actual cost of replacing your home.

Sometimes these parties disagree.  The purpose of insurance is to be able to bring you back to where you were before the loss.  Therefore insuring your home for how much it would actually cost to rebuild makes sense.  The mortgagee wants to ensure that its interests are covered.  Therefore they want the insurance to be at least equal to the loan amount.  This too makes sense, but what happens when your mortgage is more than the replacement cost of your home?  Though this doesn't happen nearly as much as it did a few years ago, it does come up. 

If you are thinking about refinancing, you need to consider the amount of your new mortgage in relation to the amount of coverage on your home.  If the mortgage amount is more than the coverage on your home, give your insurance agent a call to discuss.  There are alternatives, but it can vary by the age of your home and your specific insurance company.

"Why do I have to pay my premium in full?"

When you refinance, the mortgage company typically wants to see your homeowners premium paid in full at closing.  This is a detail that is often missed until closing.  Be sure to ask if this will be a requirement with any refinance.

You will also want to double check how the mortgagee will handle the homeowners premium upon renewal.  Consider if your premium is currently paid by your mortgage company out of an escrow account?  Will it continue to be with the new mortgagee?  The billing of your homeowners insurance may also need to be changed with the new mortgage information to ensure that a bill doesn't slip through the cracks.  Be sure to update your insurance agent with this information.

Refinancing can save you thousands of dollars over the long run.  Just be sure that you have all the facts to make sure it is worth it.

April McBriarty-Weismann is the VP of Business Development & Communicatins for Holt Proctor McBriarty Insurance Agency in Milford, NH.