Replacement Insurance Policy for Refinance

[Chivas Miho]

Hey BP! I'm right in the middle of my refinance of my first BRRRR property but I ran into an issue. My investment property is a 4-unit in Michigan that was appraised at $69,000 which was much lower than I had expected, but that's actually not the problem. Pulling out the cash is still something I want to do so I can reinvest in another property, and I qualify for $48k at 70%LTV. The problem is that the lender is asking me change my existing cash value insurance policy to a replacement cost basis policy. My current policy has a rough annual premium of $1200 or so and Foremost just told me that based on their cost estimating software, my $69k property would cost $512,000 to rebuild if the replacement policy were to kick in...and my annual premium would go from $1200 to $4,348! That's about 3.5 times the value of my existing policy. This is where I'm going crazy, the lender is requiring that I switch over to the replacement policy before we can finalize the refi but that kind of premium will cause me to go negative cashflow. The insurance policy at that rate is more than the P&I of the mortgage which just doesn't make sense.

My question here is, has anyone else experienced this problem?  And if so, what has been done to work around this?  At the moment I’m stuck and cant move forward.  Thanks everyone, appreciate the help.  

-Chivas