A question homeowners and buyers tend to ask is “Do I need title insurance?”.
In short, yes.
There’s a lot to talk about with title insurance and we’re going to cover those main points in this article.
By the end, you’ll know:
- What title insurance is.
- The types of title insurance.
- Why you should purchase title insurance.
- Cost of Title Insurance
Let’s dive right in.
What is Title Insurance?
To begin, a “title” is legal documentation that identifies features about a property (acreage, tax-ID, etc.) and who owns it.
Title insurance protects homebuyers and mortgage lenders from defects or issues with the title during the transfer of ownership.
You may ask “why would there be issues with the title?”.
Because properties often change hands between many owners over long periods of time, there can be discrepancies of ownership that lie in between. Examples of title issues are undisclosed heirs, forgeries, liens, and simple filing errors.
Most of the time, these issues can be resolved as they tend to be minor. But other times, you can pile up a large sum of legal fees while fighting a claim, or much worse, your property could be revoked.
The purpose of title insurance is to protect the homeowner from financial loss or losing their property due to factors they cannot control.
Types of Title Insurance
There are two types. Owner’s and lender’s.
Owner’s Title Insurance
This coverage is provided to the homeowner at the time of purchase, who will be covered up to the amount they paid for the home.
The insurance company protects the homeowner by paying off any valid claims against the property and provides legal assistance during a conflict.
This policy is optional to purchase and will last the length of time the homeowner holds the title.
Lender’s Title Insurance
This type of coverage provides protection to your lender up to the amount of the loan.
Any time you’re receiving a mortgage for your home, the lender will require you to purchase a policy to protect their loan.
The policy will last as long as it takes to pay off the mortgage or if you decide to refinance.
Why Should You Buy Insurance?
Besides your lender requiring it, there are lots of reasons why you would want owner’s title insurance.
For example, let’s say you don’t purchase the owner’s insurance but you buy lender’s insurance. Most times when you purchase property, you’ll be offered a “warranty deed” by the seller.
This essentially means that the seller gives the property to you and says “the deed is free and clear” of any defects, liens, or claims.
When the seller says this, sure, you may not be liable for their false claim, as they’ve now transferred the risk to your insurance company, who is protecting your lender.
However, if there is a claim that’s made on the property, only your lender will have protection. You have no protection of your interests (the property).
This means you’ll be on your own for challenging the claim. This amounts to thousands in legal fees, headaches, and after all of it, you could possibly lose your home.
Buying owner’s title insurance is more a matter of being safe than sorry.
Another reason why you should purchase insurance. Title claims can happen many years down the line, well after purchasing your home.
If you’ve already paid your mortgage and a claim is made, then there’s no firewall at all because the lender’s insurance cancels once the loan is paid for.
You might as well put out the extra cost of owner’s insurance. It’s just a one-time fee and will last you the duration of your occupancy.
The Cost of Title Insurance
Title insurance costs vary, but you’ll often face a fee that totals about 0.5%-1% of the purchase price of the home if you combine both owner’s and lender’s insurance.
Obviously, the more you pay for a home, the higher the cost will be.
I recommend speaking to your lender about closing costs and how title insurance will factor into that. You can also use this calculator.
Also, note that every state has different rules and regulations in regard to title insurance and closing costs, so do your due diligence.
I wrote a guide for closing costs in North Carolina, so you can take a peek at that.
Just for your information, some factors that go into the cost of a title insurance quote include:
- Endorsement fees
- Title search fee
- Closing protection letter
- Deed preparation fee
- Government recording charges
- Tax and other certificates
- Notary fee
- Overnight mail charge
- Wire fee
- Document preparation fee
- Settlement fee
- Email/electronic document fee
- Transfer tax
If you’re purchasing a home, you’re better off purchasing your own title insurance. Not that you’re going to have an issue of any sort.
But unfortunately, human error is the cause for most unseen title claims, and that can result in serious damages.
Protect yourself by purchasing an insurance policy.
If you have any questions, feel free to ask in the comments below or email me.