Title insurance is insurance against defects in title to real estate. It is meant to protect an owner or a lender against loss due to title defects, liens or other title issues. It will defend against a lawsuit against the title, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy.
Just as mortgage lenders require homeowners insurance to protect their investment, mortgage lenders also require title insurance to protect their interest.
Title companies will initially search public records to document what is called the “chain of title” and will try to determine if there are any claims on the property. If liens or encumbrances are found, the insurer may take steps to fix them (for example, by obtaining a release of an old mortgage or deed of trust that has been paid off) before issuing the title policy. However, in case something is missed, or in case there is an undiscovered unreleased lien, mortgage lenders require title insurance, and although title insurance is optional for the owner, it is something to always consider depending on several variables. Before deciding, talk to your settlement company, realtor, lender, friends with legal experience as well as doing your own research, and then decide if you need owner’s title insurance.
To recap, lender’s coverage title insurance is mandatory and owner’s coverage title insurance is optional.
Title insurance coverage lasts as long as the insured retains an interest in the land insured and typically no additional premium is paid after the policy is issued. So when consumers exclaim that title insurance seems to carry a high cost, they need to remember that its a one time fee. You may pay an annual fee for homeowners insurance of $700 a year, for 10 years, which is $7,000. But then a title policy for the same house may be $2,400, and is a one time fee.
And many people wonder why they need title insurance on a refinance, since they already paid for it once. But when you refinance you are obtaining a new loan, even if you stay with your original lender it is considered a new loan, so title insurance is indeed needed. However, you may not need to purchase a new owner’s title policy; the one you bought at closing is good for as long as you and your heirs have an interest in the property. So you may end up getting the existing title policy “re-issued”, in which you case you would pay a much lower reissue rate. However, the cost is not inconsequential, even if you are eligible for a reissue rate. If it has been no more than 10 years since you bought your house or refinanced, ask for a reissue rate. They are not available in every state, and you might have to meet some criteria to be eligible, so be sure to ask. After 10 years you likely will not get a reissue rate.
On a refinance, even if you recently purchased or refinanced your home, there are some problems that could arise with the title, so a new title search is needed, and title insurance. For instance, you might have incurred a mechanics lien from a contractor who claims they have not been paid for recent work done. Or you might have a judgment placed on your house due to unpaid taxes, homeowner dues, or child support for instance. The lender needs reassurance that the title to the property they are financing is clear.
And when buying a new construction home there may still be title problems for the lender and owner. My first home was a new construction townhouse, and I opted not to pay for owner’s coverage title insurance. But that may have been unwise, I was lucky, and nothing came up with the title over the four years I owned the place. But you need to realize there were most likely many prior owners of the land before the house was built, and they may have had a title issue. OR maybe the builder failed to pay subcontractors and suppliers. This could result in the subcontractor or supplier placing a lien on the property. I think there are less chances of title issues when buying a new construction home, especially from a reputable builder, than say a 200 year old historic home; but buying title insurance as an owner is still something to carefully be considered.