Question: >I pay my homeowners insurance separate from my mortgage. I have an active homeowners insurance claim for water damage due to a busted pipe. I’m trying to refinance my mortgage to get cash out to make home improvements in addition to what the insurance company is giving me for damages. Can I refinance my mortgage if I have an active homeowners insurance claim? – Lindsay H. in Florida
Denny Ceizyk from LendingTree responds…
First of all, congratulations on refinancing your mortgage while rates remain near historic lows. One benefit of cash-out refinancing is that it typically comes with lower interest rates than other financial products. Plus, you’re using the money to add more value to your home in the long run.
The answer to your question depends on whether you’ve already received the claim check, and whether your current mortgage company needs to endorse it. You should be able to refinance without any problem if the insurance check has already been signed off by your current lender. However, the new lender will need proof of enough insurance coverage for the new loan amount or the replacement cost of your home after repairs.
It gets a little trickier if the claim check hasn’t been paid and the water damage hasn’t been repaired yet. If you haven’t received your claim check, contact your insurance carrier to find out if your current lender’s name will be on the check, even if the loan is completely paid off with a refinance. To prevent any issues with paying contractors for repairs, you may need to wait until the claim check is cashed before you refinance.
You also mentioned taking cash out to make additional home improvements, which means you’ll need a home appraisal. If the water repairs are still underway when the appraiser inspects your home, the value might be conditional on completion of the work. The new lender may not allow you to complete a cash-out refinance for home improvements until the water damage has been fixed.
Your new lender may require a termite inspection to confirm that the water damage didn’t create conditions that could lead to a termite infestation later. If the termite report suggests repairs should be done, you may be required to complete those repairs before your refinance closes.
If you run into any challenges with the cash-out refinance because of the water damage or you don’t have enough equity to cover the cost of desired home improvements, consider a home renovation loan. With a renovation loan, you can borrow up to 97% of the value of your home after the repairs and renovations are complete. On the other hand, a cash-out refinance limits you to withdrawing no more than 80% of your home’s value before repairs.
Renovation loans come with a few drawbacks. You’ll need to hire a licensed contractor to do the work, and payment for the renovations is made as the work is completed rather than in a lump sum that you’d receive from a cash-out refinance. Even though the process requires a few more approval hoops to jump through, a renovation loan may be worth it if a cash-out refinance doesn’t generate enough money for your renovation projects.
One final note: Your homeowners insurance premium is likely to rise because of the damage claim. If the increase is higher than you expected, take some time to compare quotes from other homeowners insurance companies.
