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Title Insurance - What You Need to Know

Whether you are a first-time homebuyer or a seasoned veteran in homeownership, title insurance is often a mystery. This article explains the purpose and reasons for title insurance and provides insights for the next time when you are ready to buy (or refinance) a home.

The purpose of title insurance is to protect you, a property owner, from problems that could arise relating to the title of your home or land. You already realize the value of homeowner’s insurance, but probably wonder why you need to purchase yet another insurance policy.

Almost everyone who has a mortgage or plans to refinance a home is required to purchase title insurance. This is because the lender holds the title and stands to lose the most if a titling problem arises. Occasionally, when you purchase a brand-new home your lender may waive the title-insurance requirement. Why would a lender do this for a brand-new home, but not for a pre-owned home?

When you purchase a pre-owned home, it has had at least one ownership changeover. At any point during the home’s history, a lien could have been placed against the home or property and you may be unaware of it when you purchase or refinance. When that happens, the title holder has to cover legal fees and court costs and possibly settle the lien. This is where title insurance comes in.

Title insurance protects lender’s interests in the amount that has been mortgaged or refinanced. It does not protect the equity in your home, nor does it protect you. A different type of insurance, known as owner’s title insurance, is designed with the owner in mind. This is an optional purchase that can be added onto the lender’s title insurance policy.

Request that the seller provide an owner’s title policy add-on when purchasing a new home. In some areas, this is a standard part of the home-purchase negotiation process and is expected by the buyer. However, the seller may refuse. In such a situation, you would need to purchase the policy on your own if you nevertheless wanted it.

Owner’s title insurance is that it is the only type of insurance that offers coverage that ends on the date the policy is purchased. Title insurance covers only those losses that result from the actions of previous owners. The policy lasts for as long as the owner or his or her heirs have a claim in the insured property.

Title insurance covers only liens and title disputes that result from actions that occurred before the policy was purchased, regardless of how many years the home has been covered.

If your home’s value increases substantially, you may need to increase the amount of coverage. Many homeowners fail to upgrade their owner’s title insurance. Years after the date of purchase, they feel less vulnerable to titling disputes. However, this is a risk.

Many homeowners are choosing to refinance their mortgage to take advantage of favorable lending conditions. Remember to consider the cost of title insurance when refinancing. Your owner’s insurance policy will continue to be in effect for as long as you own your home, but the lender title insurance policy will become defunct once the original mortgage is paid off. Therefore, you will need to purchase new title insurance on behalf of your lender when you opt to refinance your home. Generally, the minimal additional expense is minimal does not dissuade owners from refinancing for more favorable terms.

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