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Increased Insurance Rates: Why Does It Happen During Refinancing Application?


Property insurance or more commonly referred to as home insurance is designed to cover basically all types of damages that may be incurred on your property because of fire, flood and all other types of unfortunate events. The terms of payment, as well as the specifics of the coverage, may be discussed with your home insurance provider, but your lender might get into the talks when you apply for the refinancing of your home.

Remember that the goal of both the homeowner and the lender is to protect the property by all means and keep its value up. But why do insurance rates have to increase whenever you apply for refinancing?

The recomputed insurance policy covers hazard insurance. The law does not require the homeowner to purchase a hazard insurance, but your lender might require it before they approve of your mortgage takeout. For example, the house burned down, the collateral that you used for the loan you applied for may be in ashes and the lender will be left with a piece of charred land. The hazard insurance protects the value of the investment that the lending company puts on your property.

Most lenders require borrowers to ensure that their home insurance coverage is enough to finance the rebuilding or replacement of all the damaged area of the house. This is to ensure that the insurance in place covers the balance of the loan you applied for. When the house gets burned down, the insurance proceeds will go directly to your lender. Any excess amount to that will be the cash you will receive. If you apply for a cash-out refinancing, the lender may require you to apply for additional insurance coverage to keep their investment protected.

If you apply for a straight refinancing, you simply get the excess amount once the balance has been deducted from the new loan you applied for. However, lenders may require you to increase the coverage as its interest in the loan has not increased. However, things may become a little bit more complicated as insurance company only calculates the insurance based on its replacement value and not on its actual market value. Depending on the rates, the lender may require you to purchase more coverage than you did before.

Indeed, it can be quite confusing looking at all the calculations presented to you. Despite all these, it will help to talk with an insurance representative to better understand your options. After all, you and your lender only want the best coverage of the property for your security and peace of mind.

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