Title insurance is often the last thing on your mind when you are sitting at the loan closing table. With the various fees associated with securing a mortgage, many borrowers are unaware of exactly what title insurance provides or why it appears on their closing disclosure.
However, title insurance is a fundamental component of the real estate transaction. Before you can finalize your home loan, your lender will require a lender’s policy to ensure their interest in the property is secure.
Understanding the Two Types of Title Insurance
During the mortgage process, you will encounter two distinct types of title insurance: a lender’s policy and an owner’s policy.
- Lender’s Policy: This is a mandatory requirement from your mortgage company. It protects the issuer of the mortgage from any problems with a property’s title during the transaction.
- Owner’s Policy: This is an optional policy for the homebuyer. While not required by law, it is a vital safeguard for your personal investment.
Both policies are one-time fees paid at the closing table. Unlike traditional homeowners’ insurance, title insurance does not require a monthly premium.
How the Title Search Protects You
When you pay for title insurance, a specialized company or attorney conducts an extensive search of the subject property’s history to ensure the title is “clear”. This search identifies potential claims against the property that must be satisfied before the loan can close.
Common claims uncovered during a title search include:
- Unpaid property tax liens from the government.
- Creditors attempting to collect outstanding debts from previous owners.
- Legal judgments and liens.
- Unpaid alimony or child support liens.
Undiscovered liens against a property’s title can surface years after the transaction has closed. Title insurance provides the peace of mind that your homeownership rights are protected against these hidden defects.
Estimating Title Insurance Costs
The cost of title insurance varies significantly based on your state and the value of the home. Because the industry is highly regulated in most areas, you will find that prices do not vary drastically between different insurance providers.
On average, a homebuyer can expect to pay between $1,000 and $4,000 for title insurance. Savvy shoppers often look for companies that offer extended coverage or attempt to negotiate with the seller to cover the cost of the owner’s policy as part of the purchase agreement.
The Bottom Line: Protecting Your Investment
In most real estate transactions, you will receive a warranty deed upon purchase. This document stipulates that the title to the home is free and clear of liens. However, a deed is not a guarantee that an issue won’t arise in the future.
If a title dispute occurs, the insurance company is responsible for paying legal damages, liens, or judgments associated with the title. Given that a home is often your most valuable financial asset, the added protection of title insurance is a small price to pay for long-term security.
