What is title insurance, and is it required?
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Title insurance companies cover you and/or your mortgage lender if you buy property that others make claims against. Issues can pop up even from the distant past or the future, for example:
- Your seller purchased the property after an illegal foreclosure sale (not uncommon during the Great Recession)
- A long-lost relative who owned part of the home 30 years ago turns up and sues because he never OKed the sale
- A builder did some work for the seller and did not get paid. After the sale, he sues and liens your home
Liens can prevent you from refinancing or selling (unless you pay up). Owners with legitimate claims can cause you to lose the home altogether. That’s what title insurance covers.Verify your new rate (Jan 18th, 2019)
Right to use your property
Other issues besides ownership can interfere with your enjoyment and use of the home and can affect its value. Here are a few examples:
- Right of way — A stranger could have a right to walk or drive across your front or back yards
- Easement/right of use — A previous owner could have retained a right to use your yards for any purpose, including storing his or his business’s stuff there
- Property/boundary disputes — it turns out your septic tank is actually on your neighbor’s property and must be moved
Be very careful when you read your title report and policy. In most cases, easements, rights of use, etc., are excluded from your title insurance if they are known about before you buy the home. When you have title insurance, your policy will normally protect you from any losses you suffer as a result of unknown faults in your title.
Owners vs lenders
You’re not required to carry title insurance unless you have a mortgage. Your lender will almost certainly require it to protect its interest. That policy only protects the lender’s interest, and it’s called a lenders policy.
You have to buy a new lenders policy every time you refinance your home.
The lender’s policy will protect only the lender. If a court ultimately rules your home belongs to someone else, the mortgage company will have all its losses covered. However, you, the owner, lose your down payment, the principal you repaid, and any property value appreciation. And you will be homeless.
To protect yourself against loss of home equity, you can purchase an optional owner’s policy. It’s usually cheaper than the lender’s policy (because most of us finance the majority of our home purchase). Buy both policies together and you normally get a discount.
Claims are rare — is insurance a rip-off?
Title insurance companies rarely pay out. That’s because real estate transactions, liens, easements, etc. are public records, and today’s technology makes them fairly easy to access.
Most homes come with good titles that provide their owners with all rights and protections they expect. And title companies conduct extensive title searches before writing a policy. Still, genuine issues do occasionally arise.
So while claims are rare, when they occur, they can be very, very expensive. And not having title insurance can be very, very expensive.
That said, title insurers pay out less than five percent of premiums in claims — unlike life insurers, for instance, which pay out approximately 65 percent of their premiums in claims. The image above shows how the cost of claims has dropped over the years.
However, other costs for title companies, including offices and personnel, have of course increased. Title insurance companies argue that it costs a lot more to underwrite a title policy than an auto policy. On average, American buyers pay about $1,000 for a title policy, says Realtor.com.
Then, there’s Iowa. The state runs its own non-profit title insurance program, and Iowa Title Guaranty provides the same service for a flat rate of $110 for mortgages up to $500,000. That’s a lot of money on the table. However, there are ways to save that don’t require you to move to Iowa.
Why title insurance is challenging
Title insurance can make up a sizable chunk of your closing costs — they can even be the most expensive item on the list. In many states, rates are set by law, so comparison shopping doesn’t help.
Florida, for instance, sets rates and they are not cheap. Here’s what insurance costs at different price points:
- $50,000 home: title insurance: $288
- $100,000 home: title insurance: $575
- $200,000 home: title insurance: $1,075
- $500,000 home: title insurance: $2,075
- $1,000,000 home: title insurance: $5,075
Although mortgage lenders or real estate agents often choose title insurance companies and just expect you to accept their choice, you, the buyer, have the last word.
How to pay less for title insurance
There are ways to save on title insurance.
In states that allow you to shop for title insurance, do so. Rates can vary widely. You’ll want to know the total cost of your title insurance, escrow services, and owner’s policy if you choose to get one.
If you want an owner’s policy, ask for the “simultaneous issue rate,” which discounts your costs.
While insurance premiums are set in many states, title firms can often add fees of their choosing — like mail and courier charges, copy fees, and costs for searches and certificates. Those are absolutely negotiable, which is why you want to compare the entire “out-the-door” cost between companies.
If it’s customary to split these costs with sellers, make sure that your contract stipulates that. In fact, you can negotiate that even if it isn’t customary.
Try for a “re-issue rate” with the seller’s title insurer. It has already done the work before, so all the company needs to do is to update the search to cover the time in which the seller owned the home. Reissue rates can be up to 40 percent to 60 percent less.
Don’t fall through the huge loophole
Title insurance companies only protect you from unknown problems with your title. If in the course of its searches, it uncovers issues, it will list those in a document you should receive at or before closing. Lawyers call that document by a number of names, including “title commitment,” “preliminary title report” and “title binder.”
An issue ceases to be unknown the moment it appears in your title commitment. It then becomes known. And your title insurer ceases to have any obligation to protect you from it.
Legal website NOLO.com gives an example. You move into your new home and a month later a stranger arrives at your front door. He tells you he’s going to exercise his right under an old easement to store a few tons of gravel in your backyard. You call your title insurer and it says it listed the easement in your title commitment. You’re on your own.
The moral of this story? No matter how swamped you are prior to closing, carve out the time to read your title commitment before you finalize your purchase.
Is it worth it?
By now you may be wondering whether it’s worth paying anything to title insurance companies — at least beyond the minimum imposed on you by your lender. After all, you could just have the searches done and not bother with a policy. And your lender’s policy may fight some legal battles that coincidentally benefit you.
It’s certainly true that a small proportion of homeowners ever claim on their policies. But it’s also true that long-forgotten relatives of previous owners do occasionally turn up claiming someone’s home belongs to them. And others do emerge demanding to exercise their rights under an old easement.
Can you live with those risks when it’s probably your biggest asset at stake? Some can. But many worry how easily they’d sleep at night with that sort of exposure. It’s up to you.Verify your new rate (Jan 18th, 2019)