Title Insurance: What Is It, and Why Do You Need It?

The cost of buying a home goes beyond the actual purchase price. Depending on your mortgage program, you’ll likely need a down payment. You’re also responsible for closing costs, which are lender and third-party fees. This includes loan origination fees, appraisal fees, attorney fees, recording fees, and title insurance.

While you might be familiar with some of these costs, you might ask: what is title insurance? And most importantly, why do I need it?

What Is Title Insurance?

Title insurance is a one-time upfront fee paid at closing. Although it’s included in the breakdown of mortgage costs, some home buyers don’t give much consideration to this fee. Yet, it’s important to understand the purpose of title insurance, as it protects you and your lender.

The first thing to know is that title insurance relates to the ownership rights of a property. Now, you’re probably saying to yourself, “I purchased this house from the seller, so there isn’t going to be a problem.” And in most cases, no, you won’t encounter issues.

But sometimes—even years after purchasing—someone could challenge the legal ownership of your property, and even attempt to take your property. This is how title insurance helps. You’re protected against losing your property. Plus, the insurance compensates any legal costs of defending your property.

There are two types of title insurance:

1. Lender’s policy

When financing a home, lenders require this type of title insurance. Unlike homeowner’s insurance and mortgage insurance, you don’t pay the premium monthly. Instead, you’ll pay a one-time fee at closing. This policy covers the amount of the loan for as long as you have the mortgage and own the property.

2. Owner’s policy

This is an optional policy, but highly recommended. It protects your ownership rights for as long as you own the property, and you're also protected from costly legal battles if someone challenges your ownership.

Why It’s Smart to Have Title Insurance?

Chances are, no one will challenge the ownership of your property. But here’s a look at two situations that could arise, in which case, title insurance can be a life saver.

Let’s say you purchase a home from a seller. Naturally, you assume the seller has complete ownership of the property, meaning they’re actually the owner. You might also assume that there aren’t any liens on the property, resulting in a clear title.

Even though a title search company researches the title before closing to prevent issues down the road, oversights can occur. So at some point in the future, someone (perhaps a family member or a previous spouse) might claim that the seller didn’t have the legal right to sell the property—maybe because the person challenging the title is the actual owner.

In another situation, a lender or creditor might have placed a lien on the property. And if it’s a fresh or new lien, this information might have been unavailable when the title search company researched the title. Now that you’re the property owner, the creditor or lender might seek repayment from you.

In either case, title insurance protects you and your lender in these worst-case scenarios.

How Much is Title Insurance?

A lender’s policy is typically cheaper than title insurance purchased for yourself. For a lender’s policy, you might pay between $500 and $1,500 depending on where you live and the loan amount. For an owner’s policy, you might pay between $700 and $2,000.

Final Word

Getting title insurance for yourself might seem like an unnecessary expense. And yes, it’s unlikely that someone will challenge ownership. However, if a worst-case event happens, title insurance can provide peace of mind and protect your property.

Buying a home involves a variety of costs, yet there are ways to minimize your out-of-pocket expense and make home ownership more affordable. To learn more about affordable mortgage solutions, contact the loan experts at Blue Spot Home Loans or fill out the contact form today.