Mortgage Q&A: “What is title insurance?”
When you apply for a mortgage, keep in mind you’ll need to pay a number of closing costs, including a variety of insurance policies. One you may have overlooked is title insurance, though it’s often one of the largest costs associated with taking out a mortgage.
First off, there are two types of title insurance policies. There is lender’s title insurance and owner’s title insurance.
Lender’s Title Insurance
Title insurance is required by banks and lenders (lender’s title insurance) to protect them against any lawsuits, claims and/or losses arising from the chain of title tied to the subject property.
This includes things like unpaid real estate taxes, liens, easements, fraud, court actions and other encumbrances, put in place by the government, contractors, previous lenders, and creditors.
As opposed to traditional insurance, title insurance is retroactive, meaning it covers issues leading up to when you purchased the property, not after.
It’s based on the loan amount, which is the lender’s investment. And it’s required because your lender actually has a huge financial stake in your property, probably more than you do if you didn’t put very much down on your home.
After all, if they’re lending 80% of the property value, they’re pretty heavily invested and will want to know that title is free of any defects.
Despite it being in their best interest, you as the borrower must pay the lender’s title insurance policy.
A lender’s title insurance policy lasts until the loan is repaid or refinanced; you must purchase a new lender’s title insurance policy if you refinance, regardless of whether you take out the new loan with the original lender.
However, the refinance rate should be cheaper than the basic rate tied to a purchase, so take caution, as there have been numerous complaints concerning title insurance providers charging as if it’s a brand new policy.
Be sure to ask for the “reissue rate” or “substitute rate” when shopping for a lender’s policy. You can save a substantial amount of money when purchasing a new policy for the same borrower on the same property. We’re talking half off or more!
Owner’s Title Insurance
Owner’s title insurance may also be purchased to protect you, the homeowner, against any title issues that may come up. It is OPTIONAL, though highly recommended and most homeowners opt to buy it.
The owner’s title insurance policy could be paid by the property seller (mandatory in some states), by the home buyer, or split by both parties. These rules vary from state to state and even from county to county!
The policy cost will vary from state to state, and is based on the sales price of the property, aka your investment.
An owner’s title insurance policy is indefinite so long as you or your heirs have interest in the property, meaning it’s a one-time cost.
If you purchase both a lender’s and owner’s title insurance policy at the same time, you may be eligible for a discount.
You can comparison shop for title insurance in most states, though the price is set in states like Florida, New Mexico and Texas, and pretty uniform (thanks to rating bureaus) in DE, NJ, NY, OH, and PA.
Like anything else, costs can always be negotiated, and not all title-related costs are set in stone, so be sure to shop a bit.