At some point during the mortgage process, you’ll be faced with this mysterious item known as “title insurance.” There are actual two types of title insurance. If you’re getting a mortgage, you’ll be required to get the first type. You may also opt to get the second type.

Title Insurance Defined
Title insurance offers protection in case there is a defect in the title. That is, in case someone tries to make a claim against your house for something a prior owner did, or in the event that title was improperly passed.

Lender’s Title Insurance
The lender’s title insurance protects the lender from losses in case the title is later proven to be improperly issued due to inaccessibility of the land, liens, or defective documents.

Owner’s Title Insurance
An owner’s title insurance policy protects you, the homeowner, from losses in case a clear chain of title can’t be proven, previous fraud on a title transfer, errors in title records, or other encumbrances to your ownership.

Is It Necessary?
Title claims are rare. In some cases, a title can be clouded due to fraud, but usually it just means something was improperly recorded. As part of the title insurance process, the title insurance issuer will research the recording history and declare a clear title. If title can’t be cleared, then you don’t buy the house. However, most people can’t get past this step without first paying for the title insurance policy. In this sense, title insurance protects you from the possibility of a future problem. The premium is more of an add-on, because it’s unlikely the policy would be issued if title problems were found at the time the policy was written.

What Does It Cost?
This is the tricky part. Title insurance can cost anywhere from $800 to $2,000. Depending on your purchase situation, you may be able to choose the title insurer and negotiate the rate, but you might not be able to. Nearly 80% of this fee is commission, and only 20% is for the actual insurance premium.

Do You Buy It Annually?
Unlike homeowner’s insurance or a home warranty, you only buy title insurance once. If you refinance, the new lender may ask for a new title policy, but some insurers will offer to update your current policy at a reduced rate. If you’re refinancing, ask the title insurer about this. Of course, you will need a new policy if you sell your home and buy a new one.

The fact is, it’s not that expensive to run title searches now that most county records are digitized. While they do offer an important protection and provide an important service, it could be done for far less than title insurers currently charge. Unfortunately, they’ve dug their way into the system and there’s little likelihood that we’ll get rid of the system anytime soon.

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