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Title insurance and owner’s title insurance explained

Dan Green
The Mortgage Reports contributor

What is title insurance?

When you purchase a home, a document called the “title” states your right to own the property. Title insurance protects that right against anyone else who might try to claim ownership. There are two types of title insurance to be aware of: 

  • Lender’s title insurance (required) protects your mortgage lender’s financial stake in the home 
  • Owner’s title insurance (optional) protects your financial stake in the home

Although the owner’s title insurance is technically optional, experts strongly recommend it. Title issues can come out of the woodwork at any time. And the one-time fee you pay for owner’s title insurance (around $850 on average) could protect thousands you’ve paid into the home and built in equity. 

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Title insurance definitions

If you just want the low-down, here are the basics of title insurance: 

  • Title — a term for your homeownership rights
  • Title insurance — protects your rights if a third party argues against your rights to the property 
  • Title insurance covers risks such as fraud, liens (old debts secured on the home), omitted heirs (those who should have inherited an interest in the home but didn’t) and mistakes in the public record
  • Owner’s title insurance — has you as the policyholder and the beneficiary of any claims. The one-time cost averages $850 
    Lender’s title insurance — mainly protects the mortgage lender. The one-time cost averages $550

It’s important to note that you pay the title insurance fee for both lender and owner’s title insurance — even though lender’s title insurance only protects your mortgage company. 

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Even if you don’t have a mortgage, you may want to consider owner’s title insurance. Chances are you’ll never need it. But if you do, it could save you thousands — and might even save your home, in extreme scenarios.  

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Title insurance FAQ

How much does title insurance cost?

The premium on title insurance is a one-time payment made at closing. On average, lender’s title insurance costs about $550, and owner’s title insurance costs $850. But those rates can range anywhere from $300 to $2,000 or more. The actual cost of title insurance depends on the value of the property, the insurer from which you buy your coverage, and where the home is located. You’ll need to get quotes to see how much title insurance will cost for you. 

Remember, you do not make recurring monthly payments for title insurance, like you do for a homeowners or auto insurance policy. After the one-time payment at closing, your title insurance is valid for however long you own the home. 

What is “title” for a home?

When you buy a home, you get title to it. You’re “entitled” (literally!) to ownership and to use it as you want within the law. Chances are, your title is going to be clear of issues. Most are.

But sometimes some historical claim arises. Perhaps a previous owner used the home as security for a loan that was never repaid. Or maybe the home was supposed to be part of an inheritance that got overlooked. These are the types of “title issues” that title insurance is designed to protect you against.

How does title insurance work?

Title insurance is designed to protect homeowners and mortgage lenders from losses arising from defects in titles. If someone turns up saying they own or partly own your home, your first call should be to your title insurer.

That insurer will typically take up your case and may decide to fight it through the courts. If it loses or doesn’t contest the claim because it thinks the other side will win, it should compensate you and/or your mortgage company for the money lost.

What does title insurance cover?

There are four types of title issues that title insurance usually covers:

1. Unknown liens — A previous owner used the property as security on a debt that hasn’t been repaid. Or back property taxes or child support payments remain outstanding
2. Omitted heirs — Someone who was entitled to inherit the home (or an interest in it) never got her due. Legally, she may still own the property or part of it
3. Mistakes in the public record 
4. Fraud — A previous “seller” never bought the home — or a co-owner forged a signature on key documents

Any of those might be grounds for claiming on a lender’s or owner’s title insurance policy.

What doesn’t title insurance cover?

Title insurance only protects you against unknown title issues. To flag any potential problems, the insurer should thoroughly research your title and provide you with a report before closing. If you don’t bother reading it, and it mentions an anomaly in the title (such as someone with a potential ownership claim), you’re assumed to have accepted that. And your insurer will be supremely uninterested when the other owner comes to call.

What is an owner’s title policy?

Earlier, we mentioned that the title insurance company will compensate “you and/or your mortgage company” if it fails to resolve a title issue. This is where the two different types of title insurance come into play. If you only have lender’s title insurance (the required one), your lender is the only one that will be compensated in a lost claim. But if you also have owner’s title insurance (the optional one) you would also be reimbursed for money or property lost.  

Owner’s title insurance protects your “stake” in the home, including your down payment and any equity that’s built up. That could be equal to tens of thousands of dollars. Again — it’s unlikely a title issue will ever arise. But for many homeowners, the peace of mind offered by title insurance is worth the one-time premium.

Who pays for title insurance?

The person who pays for title insurance is always … You! That applies to lender’s title insurance as well as owner’s title insurance — even though lender’s title insurance only protects your mortgage company. It’s always the homeowner who pays, unless you’re lucky enough to live in a state where sellers traditionally cover the cost.

Do I need title insurance?

If you need a mortgage, you’ll have no choice but to pay for a lender’s policy. So the question is: Do you need owner’s title insurance?

Statistically, you may like your odds and choose to skip it. Title insurance stats show that only 3-4% of the premiums these companies collect gets paid out in claims — meaning not a lot of people are making them. Or at least, not making them successfully.

But suppose you’re the rare case who does need and get protection. How big a financial hit would you take were the worst to happen to what’s probably your biggest asset? 

If you’re financially conservative or a natural worrier (or if you buy a home without a mortgage and have no lender’s cover), you might find that the premium is well worth the cost, if only for peace of mind. Remember, owner’s title insurance costs $850 on average, you only pay once, and the policy lasts as long as you own the home.

Understand your other closing costs

Title insurance is just one item in a laundry list of fees you’ll pay at closing. To understand all your closing costs — and how to lower them — check out our complete guide to closing costs.

Or, start your search with custom mortgage quotes using the link below.

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