The closing costs on a typical mortgage loan can seem overwhelming. According to Zillow, the closing costsfor a $150,000 home can range from $3,000 to $7,500, with an average falling around $3,700.
So when you discover that you'll also have to pay for something called title insurance when closing your loan, you might wonder if this fee is necessary, or if title insurance is something you can skip.
Here's the short answer to those questions: Yes, title insurance matters. And no, mortgage lenders won't let you skip it.
What Title Insurance Does
To sum up, title insurance protects you from clerical errors, mistakes in property records, or unpaid taxes involving the home you are purchasing.
Maybe the past owner of the home hasn't paid property taxes in years. If you buy the home, the government agencies levying those taxes will come after you to pay them — unless you have title insurance.
Or, maybe a past seller bought the home with a sister. Maybe these two siblings had a falling out, and the brother sold the home without telling his sister. That spurned relative could come after you for the profits she says she is owed from the sale — again, unless you have title insurance protecting you.
Title insurance is like most other forms of insurance: You pay for it in the hopes that you'll never need to use it.
What Title Insurance Doesn't Do
Title insurance covers the window of time before your ownership of the home, protecting you from certain claims and legal fees that were beyond your control. Even though it extends backward through time indefinitely, coverage ceases on the date you take ownership. If you decide not to pay property taxes once you're the official homeowner? That's on you.
A Two-Part Transaction
Title insurance will be included as part of your third-party closing fees, charges levied by companies that work with your mortgage lender to originate your home loan.
There are actually two parts to title insurance. First, the title company providing your insurance will search all the property records associated with the home you are buying to make sure there aren't any unpaid taxes, long-lost heirs, or charges of fraud associated with the property. This is known as the title search.
Once the search is complete, and the title insurer is confident that the seller has legal ownership and the right to sell the home, it will create two title policies. The lender's title policy protects your lender from anyone claiming rights against your property. It also reimburses your lender if you lose your house to a title claim and are no longer making your mortgage payment. All lenders will require that you pay for a lender's title insurance policy.
The second part of title insurance is the part that actually protects you: the owner's policy. This policy protects you from the above mentioned unreleased liens, people who might claim ownership of your home, or public record errors that were missed during the title search. Most lenders will also require that you purchase an owner's policy, too.
How Much Will It Cost?
Title insurance is not cheap. In fact, it ranks as one of the biggest fees buyers will pay when closing a mortgage loan.
The cost of this insurance does vary quite a bit, usually depending on where you live. But you can generally expect to pay a one-time premium between $1,000 to $3,000 for title insurance.
Most lenders will select a title insurance company for you. But you aren't required to work with that company. You can shop around for lower rates. This is usually a smart move: You can often shave hundreds off the cost of title insurance by shopping around.
Article by Dan Rafter on 3 February 2017