Title insurance assures homeowners and mortgage lenders that a property has a marketable (valid) title. If, for example, someone makes a claim that threatens your ownership of the home, the title insurance company protects you and the lender against loss or damage, according to the terms and provisions of your respective title insurance policies.
Most of your title insurance premium is spent on research to determine who legally owns the property that you want to buy and to find out whether there are any unpaid tax liens or judgments recorded against it. Because title companies do a good job of eliminating title risks before folks buy property, only about 10 percent of the premium goes toward indemnifying homeowners against title claims after the closing. You pay this premium only once at close, unless you refinance your mortgage.
If you refinance your mortgage, you'll have to get a new title insurance policy to protect the lender from title risks (such as income tax liens or property tax liens, for example) that may have been recorded against your property between the time your previous policy was issued and the date of the refinance.
If you refinance your loan, ask the title company whether you qualify for a refinance rate on the new title-insurance policy. Most title companies will give you a big premium reduction -- as much as 30 percent off their normal rates -- if you are within five years of the old policy's issuance date.
Two kinds of title insurance
As a homeowner, you have a choice of two different kinds of title insurance. Depending on the extent of the coverage that you desire, you can either get a standard-coverage policy or an extended-coverage policy.
- Standard title-insurance policy is less expensive than an extended policy because its coverage is more limited. Standard policies are limited to certain off-record risks (such as fraud in the chain of title, defective recordings, and competency) plus recorded (at the local County Recorder's office) mechanic's liens, tax assessments, judgments, and other property defects that a search of public records can uncover.
- Extended title-insurance policies cover everything that standard policies do, plus they provide expanded coverage for off-record risks that could be discovered through an inspection of the property or by making inquiries of people in actual possession of the property, as well as defects such as unrecorded (never recorded at the County Recorder's office) mechanic's liens, leases, or contracts of sale.
Paying for title insurance
Title insurance costs vary greatly, depending upon the geographic area in which your home is located, the home's purchase price, and the type of coverage that you get. In addition to the owners policy that we recommend you purchase to protect your investment, you'll also need to buy a policy to protect the mortgage lender against loss on the loan amount.
Local custom and practice determine who usually pays for title insurance. The payment for title insurance is a negotiable item. Regardless of local custom, if you're in a strong buyer's market, the sellers may offer (or you could ask them) to pay your title insurance costs in order to put the deal together. If, conversely, you're bidding against several other buyers for a particularly desirable house, you'd be smart to sweeten your offer by paying for title insurance, even though local custom prescribes that sellers pay for it.