How Refinancing Affects Your Title

When you, the borrowers, give a mortgage to a lender, you give the lender an interest in your property as security for your promise to repay the loan. In many instances, the lender's financial stake in the property is greater than yours.

The mortgage gives the lender a conditional interest in the property. This means that as long as the payments on the loan secured by the mortgage are being paid, the lender's interest is junior to yours. However, in the event you fail to meet the terms of your agreement, the lender has the right to have your interests in the property extinguished through foreclosure. Foreclosure is the mechanism which enables the lender to take or sell the property to satisfy the debt you owe.

Because the lender has a substantial sum at risk, it is entitled to seek a number of protections. Some of these protections involve insurance.

Casualty Insurance

This type of insurance is commonly referred to as the "homeowner's policy." It protects you, the insured, against loss which could be sustained in the future as a result of fire, theft or other mishap. Because a serious loss could reduce the value of the property below the amount owed to the lender, the lender has a right to be added to your homeowner's policy as a party who may be entitled to a portion of the proceeds in the event of a loss ("loss payee"). If you are refinancing your property with a new lender, it will ask that you provide evidence that its name has been added to your homeowner's policy for this purpose. Assuming your premiums for the current year are paid, you will not incur any additional cost since your annual premium pays for full coverage.

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Flood Insurance

This is a special type of insurance that covers future losses due to flooding, which losses are not covered by most homeowner's policies. If your property is located in an area requiring the purchase of flood hazard insurance, the lender will ask that you demonstrate that you have this insurance and that you have added its name as a "loss payee" as part of its requirements for the refinancing.

As with homeowner's insurance, flood insurance covers the risk of any loss due to flooding that may occur during the year for which the premium has been paid. If the premiums are current, refinancing will not result in additional flood insurance premiums. Of course, as with homeowner's insurance, a new premium is payable each year.

Flooding in a neighborhood

Title Insurance

This type of insurance protects against problems in the title to your property. It focuses on the past, not the future. It insures you that your interest in the property will be secure as of the time that interest was acquired. For example, in the case of an owner policy, you are insured as of the time of purchase of the property. A mortgagee policy insures the lender as of the time the mortgage is recorded. Because the insurance covers against loss by reason of the existence of a title problem at a particular time, there is only a single premium.

When you refinance your mortgage, a new title insurance policy insuring the new mortgage will be required. This is because the old policy specifically insured the old mortgage, which will be released when the new mortgage is recorded. A title search will be required from the date of the last policy to determine if there have been any liens, encumbrances, or transfers of interest regarding the property since the earlier mortgage. The new policy will have a later "effective date," which usually is the date the new mortgage is recorded. The new policy will insure that the old mortgage has been released, and that the new mortgage is an enforceable first lien against the property as of the new effective date.

When a new title insurance policy is issued, you will have to pay another insurance premium. However, many title insurance companies offer some form of credit or discount based on the prior policy of title insurance. Many attorneys are agents for one or more title insurance companies and they can provide you with a complete statement of the title search charges and the insurance company's premium for the policy in connection with the refinancing of your mortgage.

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Mortgage Insurance

This type of insurance is required by lenders if the amount borrowed is high when compared to the value of the property. Generally, mortgage insurance is required when this so-called "loan-to-value ratio" exceeds 80%. The purpose of the insurance is to protect the lender against non-payment of the loan by you, the borrower.

If you do not presently have mortgage insurance, you may be required to purchase it if the amount of your new loan has a higher loan-to-value ratio. If the ratio is reduced as a result of the refinance, borrowers who presently have mortgage insurance may no longer be required to purchase it.

The date of the mortgage is the anniversary date for the purpose of mortgage insurance premiums which are paid on an annual basis. The premium for the first year of coverage by new borrowers is generally higher than renewal premiums in subsequent years.

Some companies refund the unused portions of prepaid premiums. If you change mortgage insurance companies, you may be required to pay a new initial year premium as a result of refinancing through a new lender.

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Credit Life Insurance

Credit Life Insurance is a type of life insurance which pays the balance owed on your mortgage in the event of your death.

If you have credit life coverage prior to refinancing, you may have difficulty transferring the coverage to the new mortgage. The transferability of your coverage may hinge on a) an agreement with your lender and b) the amount of coverage for the existing mortgage being less than the new mortgage amount since credit life is declining term coverage. Where the policy is transferable and the annual premiums are paid to date, you must notify your carrier to add the name of the new lender as loss payee.

In general, credit life is non-transferable. Therefore, if you wish to continue such coverage when refinancing, a new policy will be issued and a new premium paid.

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