By the time you have saved for your down payment, put funds in escrow for your dream home, and paid for a home inspection or survey, you may be in the mood to conserve some cash.
But if skipping the purchase of title insurance seems like a good idea, you might want to think twice. When you close on your new home, your closing costs can include two kinds of title insurance, both of which may strike you as unnecessary.
What is title insurance, and why buy it?
The primary role of a title insurance company is to research the legal history of the property in order to anticipate any potential problems and resolve them before you close on the purchase. After you close, a title insurance policy continues to protect against any claims on your property that were not found before closing.
There are two types of title insurance: Lender’s title insurance and owner’s insurance title. Lender’s insurance is a requirement if you are getting a loan. An owner’s title insurance policy is technically an option, but most real estate attorneys recommend their clients purchase one.
Your lender will require you to buy title insurance to protect it if a problem were to arise regarding your legal right to the property. If you want the mortgage loan, you usually have no choice but to buy a lender’s title insurance policy for the amount of your loan that will benefit the lender should there be problems down the line.
However, if a problem with your title is discovered after you close, the lender’s title insurance policy does not usually protect you, the owner. Without your own owner’s title insurance policy and coverage, you could lose any equity you have in your home.
Such problems occur infrequently, but when they do, owners can lose their property and equity, says Jeremy Yohe, vice president of communications at the American Land Title Association.
“Just last year in Missouri a family purchased a home for more than $400,000 and a lien was missed during the search,” says Yohe. “The title insurer paid off the lender, but the family was not covered.” In another recent case, a homebuilder sold and financed a home to a first-time buyer, but because the builder financed the sale, neither had title insurance, according to Yohe. When there a lien was found on the property, the family lost its home, and the builder went bankrupt.
How much does title insurance cost?
Once your mortgage loan is approved, the lender provides a list of estimated costs for closing services, including title insurance and the name of a title insurance provider. Title insurance usually costs about 0.5% of the purchase price of the home, depending on where you live and the company you use. So, for a $400,000 house, title insurance could cost as much as $2,000.
Costs vary, and depending on your circumstance, there may be opportunities to save money on title insurance. Just because your lender recommends a title insurer doesn’t mean you must use that company. Shop on the Internet and compare rates from title insurance companies licensed in your state.
When you settle on a title insurance company, negotiate any add-on or ancillary fees that are present in nearly all cases. Yohe said he recommends buyers ask title companies exactly what their costs and fees cover. Some companies will include only basic coverage and may bill separately for search and other services, while others might have a single fee, depending on state law.
Next, you can decide if you want to purchase an additional policy called owner’s title insurance. Ask for the “simultaneous issue rate,” and the title insurance company likely will discount the cost of the lender’s policy.
According to Yohe, consumers may be able to save as much as 50 percent of the cost of the second policy, depending on your state. Plus, if you refinance your mortgage loan sometime in the future, you will have to buy a new policy for your lender, but your original owners policy will remain in effect as long as you or your heirs own the home.
“Your home is the most expensive purchase you will make,” says Yohe. “Unlike other insurance coverage, title insurance is a one-time charge that works out to be very reasonable when you amortize it over the years you will own your home.”
Steve Cook is editor of Real Estate Economy Watch and covers real estate and mortgage finance for leading news sites. He is a member of the board of the National Association of Real Estate Editors and was twice named one of the 100 most influential people in real estate. Cook was vice president for public affairs for the National Association of Realtors.