What Is Title Insurance and How Does it Work?

Photo to accompany story about title insurance. Getty Images

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If you’re financing a home purchase, you’re going to need title insurance.

Unlike other insurance coverage, title insurance actually protects your lender, even though you — the buyer — will pay for it. Keep in mind there’s also an optional owner’s title policy, too, which protects the homebuyer from property title issues.

Getting title insurance is part of the mortgage closing process with the closing agents, title business, lender, and real estate lawyers who all work together to handle the final paperwork. 

Once you close on your home, the seller transfers their legal ownership of their home, or “title,” to the lender until the mortgage is fully paid. Title insurance safeguards you and the lender if someone sues later on and tries to claim your property from a time before you purchased it.

“Lender’s title insurance is required in almost all cases by the lender for their protection, but owner’s title insurance is absolutely optional,” says Matt Medaries, vice president and general counsel at Navy Federal Title Services, the title insurance arm of the Navy Federal Credit Union. 

“But without that optional title insurance in place, for example, you could either be forced to pay a judgment to have a lien released or have to hire an attorney to sue your seller. That’s just one risk of many that we frankly don’t know when we’re sitting at the closing table.”

What Is Title Insurance?

Unlike other typical insurance policies, title insurance doesn’t protect your home against future incidents. It protects your home from any past defects or issues with a title after ownership was transferred to you. Common title issues to be mindful of include public records errors, unknown liens, forgery, disputes over land boundaries, and unknown easements.

There are two types of title insurance policies you can buy when you purchase your house: lender’s title insurance and owner’s title insurance, with the latter being optional. Here’s a breakdown of how they differ:

Lender’s Title Insurance vs. Owner’s Title Insurance 

Lender’s title insurance is for the benefit of the bank. Although it protects the lender, the buyer is required to pay for it. This type of policy ensures the lender has the first lien on the house in the event of foreclosure or unpaid property taxes.

“The lender wants to be the first in line to get the proceeds” in these situations, says Gerry Glombicki, director of insurance at Fitch Ratings, one of the largest credit rating agencies in the world.

The only time you don’t have to pay for lender’s title insurance is if you pay for a home with cash and don’t borrow any funds to make that purchase. Although you’re not technically required to buy owner’s title insurance, Glombicki and Medaries say it’s in your best interest to get it.

Pro Tip

If you were to ever refinance your home, you’ll have to purchase a new lender’s title insurance policy but you don’t have to pay for owner’s title insurance again, says Glombicki. Your owner’s title policy will remain in effect before, during, and after your refinance. Because you have more equity in your home and the lender is protected for less, the cost of lender’s title insurance goes down when you refinance.

Owner’s title insurance lasts for as long as you own the property. Unlike lender’s title insurance, this type of policy solely protects the owner of the property from ownership claims. 

For example, if there’s suspected forgery with the title or there are issues of ownership from conflicting wills and lawyers need to get involved, any related legal fees will be covered by the owner’s insurance. Another example: if the previous owner left the property with several liens because of unpaid taxes or unpaid HOA fees, your owner’s insurance will cover it. 

If you choose not to buy owner’s title insurance, then you’ll be financially responsible for correcting any title issues that pop up down the road, which can be costly. For example, you may have to hire a lawyer to dispute any ownership claims; or if the previous owner didn’t pay their property taxes, you’ll likely have to foot the bill. 

How Much Does Title Insurance Cost?

The cost of title insurance varies widely from state to state and depends on the price of your home, as well as the home’s value. 

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“States regulate the prices, so one state could be different from the other,” says Glombicki, adding that you should expect it to cost around 0.5% to 1% of the home’s value. Title insurance is a one-time premium that is usually rolled into closing costs, and remains in effect for as long as you own the home (unless you refinance).

The premium you pay for the lender’s policy is based on the amount you borrow, whereas the cost of the owner’s policy is tied to the home’s value. 

“The more you borrow, the more expensive the lender policy will be. The less you borrow, the less expensive the policy will be. For an owner’s policy, the more expensive the house is, the more expensive that policy will be and vice versa,” says Glombicki. 

In certain states, if the seller already has an owner’s title policy that’s less than 10 years old at the time of sale, you may be eligible for a discounted rate, also known as a reissue rate, says Medaries. The discount rate ranges from 25% to 60% off, with 40% being the most common. Make sure to ask your lender about title insurance discounts before closing. 

Keep in mind you can shop for title insurance policies separately, but it’ll usually cost less if you use the same insurance company for both the lender’s policy and the owner’s policy.

“Title insurance is not that expensive to buy,” says Glombicki. “The majority of people do tend to buy it because it protects the home purchase, which is usually your largest bank transaction.”