Use Home Equity to Lower Your Home Insurance
Thanks to the current housing market, you might have better home equity than you know. Of course, once you know about this windfall, you might be tempted by a cash-out refinance where you end up on vacation in Aruba. But did you know there are ways you can lower your home insurance by using these funds wisely?
What’s more, cheap home insurance does not mean poor coverage. Here’s what you need to know about your home equity and how you can maximize its use.
Get Your Money
Home equity is the difference between your home’s market value and what you still owe. You may be unaware of how much your home is currently worth and therefore unaware of your equity. However, that difference in worth can turn into funds at your disposal.
You can access your home equity in different ways.We’ll look at the following:
- Home equity loan
- Home equity line of credit
- Cash out refinance
Home Equity Loan
For example, you can take out a home equity loan. This is a loan that typically offers a better interest rate than a personal loan or credit card; plus, your interest rates could be tax-deductible.
Home Equity Line of Credit
You can also opt for a home equity line of credit (HELOC). Unlike home equity loans, HELOCs can have variable rates. A HELOC sets a period of time to withdraw sums of money. It acts a lot like a second mortgage. A HELOC is good for someone who does not have ready cash but would like to improve their home value.
Cash Out Refinance
You can cash out your equity through refinancing. Simply put, you buy out your existing loan, pocket the difference, and lock into a new mortgage. Of course, this means new closing costs and a new loan agreement. Read the fine print and look at the long-term savings for accurate comparison.
Ditch Your Mortgage Insurance
Once you figure out your home equity, see if you can get out of your private mortgage insurance (PMI) early. Many homeowners do not have or choose not to pay 20% upfront for a downpayment and therefore are required to provide private mortgage insurance.
If your home value has risen thanks to a rise in the market, you can ask for a new appraisal to free you from mortgage insurance. You might have the option of using a broker price opinion instead of an expensive appraisal. Find out the terms of your specific mortgage by talking to your lender.
Finally, if you refinance, you usually can get out of PMI. Remember that refinancing will require paying closing costs again, but the savings in interest should be significant enough to merit this.
Invest in Your Home
So, you’re free of mortgage insurance. You found the best way to turn your equity into usable funds, so what should you do with that money? There is plenty of advice about where to invest. But consider using your cash to improve your home and even lower your insurance costs in these ways:
- Disaster-proof your house
- Save specifically for out-of-pocket repairs
- Prioritize safety
Disaster-Proof Your House
You can lower your monthly home insurance premiums by investing in a new roof or windows. Such improvements lower your home’s potential risk in bad weather. Insurance companies recognize this and can offer lower rate options.
Homeowners insurance is often available from car insurance companies as well. Companies like Progressive that have auto insurance also have plenty of home insurance offerings.
Build a Buffer
You could save the cash from a refinance and set it aside expressly for home needs. Freeing up your finances can help you tolerate a higher deductible for your home insurance policy. Higher deductibles can qualify you for lower premiums.
Improving the safety of your home can also help you improve your home insurance options. For example, insurance providers offer incentives for installing home security systems, especially ones that have off-site monitoring. Investing in safety devices such as a fire extinguisher can lower your rates as well.
Take a fresh look at your home value, use your equity wisely and you can renegotiate your homeowner’s insurance. Do your homework, and you could save plenty in the long run.
Look to the Future
As with any loan or credit opportunities, be wise to the risks. However, home equity might provide you with enough extra cash to start your own business. By lowering monthly costs like mortgage insurance, home insurance premiums, or refinancing at a lower interest rate, you can save in the long run.
Maria Hanson writes and researches for the insurance comparison site, USInsuranceAgents.com. She is passionate about empowering homeowners to find their best insurance options.
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