Buying a new house can be one of the most exciting events of your life. It’s an occasion that signifies that you are settling down – “building a nest,” so to speak – and maybe even starting a family.
It is, however, often a stressful and costly process, and you are sure to want to trim costs whenever possible. By the time you’ve completed your final walk-through, secured your mortgage, and calculated your closing costs, the last thing you want to do is add yet another expense like title insurance. However, it may be necessary – and it could save you a lot of money in the long-run.
What Is Title Insurance?
Title insurance is an insurance policy designed to protect both the mortgage lender and the new homeowner from anything that could negatively affect the title of the home. Title insurance premiums pay for extensive research on the title, which is designed to spot any title discrepancies or disputes.
For example, let’s say you’ve been settled into your new home for several months. But one night, as you sit down to dinner, there’s a knock at the front door. A young man you’ve never met is standing on your stoop claiming to be the great-grandson of the previous owner, and is now demanding the rights to your home.
Undisclosed heirs are just one of the many types of lien discrepancies covered by a title insurance policy. Should the need to contest the rightful ownership of property in court arise, title insurance will cover all of your legal costs. The specific type of coverage you receive depends on the type of policy you invest in.
A lender’s policy, which only protects the mortgage lender, covers:
- Mechanics liens and unrecorded liens, such as unrecorded utility charges
- Unrecorded easements, such as prescriptive easements (e.g., if a neighbor has been using part of your property for several years)
- Unrecorded documents, such as “one-dollar deeds,” whereby a family member may attempt to gift the property without going through proper legal channels
- Property defects, such as timber decay due to insect attack
An owner’s policy, designed to protect the investment of the homeowner, covers:
- Incorrect or unauthorized document signatures
- Defective records
- Restrictive covenants
- Examining record mistakes
- Undisclosed heirs
- Deed omissions
Extended coverage, which can be purchased on an owner’s policy, covers:
- Covenant violations, such as a loan default
- Living trusts, such as a grandfather holding legal title to a property for his grandson (his beneficiary)
- Building permit violations
- Forgeries, such as signature alterations on a deed
- Encroachments, such as a pool or deck crossing your property line
- Subdivision maps provision, which can protect from possible encroachments
Is Purchasing a Title Policy Necessary?
It depends, but most likely you will need to purchase a title policy. According to The U.S. Department of Housing and Urban Development, “Title insurance is usually required by the lender to protect the lender against loss resulting from claims by others against your new home.” So when it comes to getting a mortgage, you’re more than likely going to have to purchase a lender’s title insurance policy.
An owner’s policy, on the other hand, is optional. However, it’s a solid investment that can save you a lot of money and headaches in the future if there are any discrepancies associated with the title of your new home. An owner’s policy is especially pertinent if you’ve spent a hefty down payment on your home, as it will protect the equity.
How Often Does a Policy Need to Be Renewed?
You only need to add the cost of a title insurance policy to your closing costs once. An owner’s policy belongs to you until you decide to sell your home. You will, however, have to purchase a new lender’s policy if you plan to refinance your mortgage. Refinancing with the same lender can save you a great deal of money, as most of the paperwork has already been completed.
How to Lower Your Title Insurance Rate
The average cost of owner’s or lender’s title insurance is about $2,000 or 0.05% of the purchase price of your home. However, don’t feel that you must accept the given rate on your closing paperwork.
- Shop Around. You don’t have to accept the title insurance company your real estate agent recommends. If your agent tries to dissuade you from shopping rates with different companies, ask if he or she will receive a commission on the recommendation. There is nothing innately wrong with this, but it could sway your agent’s judgement of what is in your best interest. It’s your money, and you have the right to shop around and obtain quotes from multiple companies before closing.
- Negotiate With the Seller or Real Estate Agent to Pay For It. Sometimes, your real estate agent will cover the cost of title insurance for you. When a real estate agent can guarantee a good title, this establishes an atmosphere of good faith, and the buyer can make the purchase with confidence.
- See If the Home Was Recently Sold. Do some research to see if your new home was sold in the past five years. If so, you can check with the company that wrote the original policy and save hundreds of dollars, since most of the paperwork has already been completed.
- Qualify for Discounts. If you’re a first-time home buyer, senior citizen, or will be living in a subdivision, you might qualify for a title insurance discount. Speak with your mortgage lender or real estate agent for more information.
When It’s Time to Refinance
If after living in the home for 5, 10, or 15 years you decide to refinance, you can save money on title insurance. You don’t have to buy a new owner’s policy, but you do need to purchase a new lender’s policy. Refinancing with the same lender can save you up to 50% of costs since most of the paperwork and research on the home has already been done.
Owning a home can be a dream come true. And title insurance not only protects your equity while you own your home – it’s also there for you when you decide to sell. Many prospective buyers are reluctant to purchase a home without title insurance. Not only can the absence of title insurance increase their up-front costs, but it may make them wary of you and the property you’re selling.
If title issues arise and you’re not covered, you alone will be responsible for any associated costs, which can be steep. Including the cost of title insurance into your closing costs can protect you from significant financial and legal headaches, and is essential to protecting your investment.
Have you ever had to use your title insurance? What are some of the surprises you encountered?
(photo credit: Bigstock)