Refinancing your mortgage can feel like hitting a "reset" button on your home loan. Whether you're chasing a lower interest rate, shortening your loan term, or switching from an adjustable-rate to a fixed-rate mortgage, refinancing brings a lot of potential benefits. But one thing homeowners often overlook is how refinancing can impact mortgage insurance — and while we're at it, it's also a good time to revisit your homeowners insurance too.
Let’s break it all down.
First, a Quick Refresher: What Is Mortgage Insurance?
Mortgage insurance protects lenders in case a borrower defaults on their loan. If you bought your home with less than 20% down, chances are you’re paying either PMI (Private Mortgage Insurance) on a conventional loan or MIP (Mortgage Insurance Premium) on an FHA loan.
It’s important to remember: mortgage insurance benefits the lender, not you — but you’re the one footing the bill.
How Refinancing Changes Mortgage Insurance
When you refinance, you're essentially replacing your old mortgage with a brand-new one. That new loan comes with new terms — and possibly new rules about mortgage insurance.
Here’s what could happen:
1. You Might Get Rid of Mortgage Insurance
If your home has increased in value, or if you've paid down enough of your original mortgage, you might now have more than 20% equity. With enough equity, when you refinance into a conventional loan, you may no longer need PMI.
This can save you hundreds (even thousands) of dollars a year!
Example:
If you originally bought your home with 5% down, but now your home’s value has gone up and you've paid down the principal, you could hit that 20% equity mark. When you refinance, you can ask your lender to waive the PMI requirement.
2. You Might Still Have to Pay It
If you still have less than 20% equity when you refinance, you’ll likely have to pay PMI again on your new loan. Some lenders also require mortgage insurance for certain loan products regardless of your equity.
Good to know:
Even if you have to carry PMI initially, once you build enough equity with your new loan, you can usually request to cancel it later — without refinancing again.
3. FHA Loans Are a Little Different
If you're refinancing an FHA loan to another FHA loan (through an FHA Streamline Refinance, for example), mortgage insurance usually sticks around. FHA loans require mortgage insurance for the life of the loan unless you refinance into a conventional loan.
If you have enough equity, refinancing from FHA to a conventional loan can help you escape FHA’s ongoing MIP costs.
What About Homeowners Insurance?
Now’s a good time to talk about homeowners insurance too, because refinancing doesn’t just affect your mortgage terms — it can also be a smart time to review and update your homeowners insurance policy.
Here’s why:
- Lender Requirements: Your new lender will want proof that your home is adequately insured, and they might have specific coverage requirements. You’ll need to provide updated insurance documents before closing.
- Coverage Check: As your home value changes, so should your insurance coverage. If your home has appreciated or you’ve made significant upgrades (like a kitchen remodel or a new roof), you may need to increase your dwelling coverage.
- Opportunity to Save: Since you’re already doing paperwork and making big financial moves, why not shop around for better homeowners insurance rates too? Bundling home and auto policies, switching providers, or adjusting deductibles could lead to meaningful savings.
Final Thoughts
Refinancing can open the door to lower monthly payments, better loan terms, and yes — freedom from mortgage insurance. But it’s not automatic: it all depends on your home’s current value and how much equity you've built.
And don’t forget, as you update your mortgage, it’s a smart move to reassess your homeowners insurance too. Making sure your home is properly protected (and possibly even saving some money) is a win-win.
Before you refinance, talk to your lender and your insurance agent. A little bit of planning can lead to big benefits for your wallet — and your peace of mind.