A mortgage refinance may have some negative consequences that you never anticipated.
Most people know that a meal in a Thai restaurant could bring on an allergic reaction, or that flooring it on the highway could lead to a speeding ticket. But who knew that a mortgage refinance could lead to a more expensive insurance premium?
FICO's cousin, the credit-based insurance score
You've heard of a credit score; that's the number that lenders use to predict how reliable you are when paying back your debts. But you may not have heard of a credit-based insurance score-that's the number that insurance companies use, in part, to predict whether you're going to file a slew of claims that will cost the insurer a whole lot of money.
When an insurer needs to price your prospective policy, the underwriter will review your credit-based insurance score, along with the information in your application or policy, your claims history, your driving record, and property reports. All of these items give the insurer some insight into your level of risk as a customer to insure.
The credit-based insurance score focuses specifically on the likelihood that you'll file a higher-than-average number of claims-a prediction based on the information in your credit report. If you're deemed low-risk in this regard, you get a high score. If you're deemed high-risk, you get a low score. Since more claims mean greater losses for the insurer, a low credit-based insurance score generally results in a higher insurance premium for you.
Fair Isaac Corporation provides credit-based insurance scores under three different names: InScore at Equifax, the Experian/Fair Isaac Insurance Score at Experian, and the Fair Isaac Insurance Risk Score at TransUnion. The following types of credit data are included in the calculation of the score.
- Payment history
- Amount of total debt
- How long you've maintained credit accounts
- New account openings
- Types of credit used
If you have blemishes on your credit report, they'll be reflected in your credit-based insurance score and, in turn, in the price of your insurance.
Where refinancing comes in
A mortgage refinance involves credit inquiries and new account openings, both of which could pull your credit-based insurance score down. But these actions alone wouldn't normally affect the cost of your insurance dramatically. There may be a more pronounced effect, however, if you're refinancing due to other financial problems. An example would be funding a cash-out refinance to consolidate several maxed-out credit cards.
While you may be interested in trying to manage your credit-based insurance score, it's probably not necessary. You're better off focusing on strengthening your financial position by paying down debt and increasing your savings. When you pursue those two goals, your credit-based insurance score and your FICO will both respond favorably. That's a cause-and-effect relationship that you can count on.