What is Title Insurance and Why Do I Need It?

What is Title Insurance and Why Do I Need It?

  • Sean O'Leary
  • 11/6/22

How much do you know about title insurance? If you’re like most people, not a whole lot. Title insurance sounds important, but the name itself and the concept behind it can make it seem like an unnecessary expense, particularly if you already have homeowner’s insurance or have never bought or sold a property before. Title insurance is different from homeowner’s insurance in that it protects your property rights—not your personal belongings—in case anything goes wrong during the sale or transfer of ownership of your home or land.

 

What is title insurance?

Those who are perhaps uninitiated to real estate transactions, especially first-time homebuyers don't know what title insurance is. And the short answer is that there are two kinds of title insurance. So to start with, you have lender's title insurance, which is type number one. Type number two is owner's title insurance. 

Owner's title insurance is for a homeowner's peace of mind, as it can protect them in case anything goes wrong down the line - including things like divorce, death, or bankruptcy. If you're buying a house from someone who owns their own property outright, they'll need to get their own owners' policy. 

But if you're borrowing money to buy your house, lenders will often require you to take out the lender's title insurance on top of your mortgage. Lender's title insurance protects lenders against loss resulting from ownership claims against a property before it was purchased by the borrower (you). But unlike an owner's policy, a lender's coverage typically only pays up to 80% of what the lender paid for the loan. Whereas owner's title insurance covers 100% of the cost of repairs to your home after a claim has been made against you. That means if someone comes forward later and says they had a lien on your home when you bought it, the lender's title insurance may not pay for all the costs associated with fixing any damage done while that person had possession of the property.

 

Why do I need title insurance?

So back to why do we get it? The lender requires you to get it. And lenders are often conservative and try to immunize themselves against any and all risks as much as they can. But I think also, it's a prudent thing to do. The lender certainly thinks so. And as an owner, you can make that assessment of whether you want to make the one-time policy premium payment for an owner's policy. It's always optional here in Rhode Island. And sometimes that decision is best made after as a buyer, you can receive the title search, that's usually one of the first things performed with respect to your purchase, and see like any insurance policy that you take out whether the policy premium is worth the risk. And that in a nutshell is why we get title insurance.

 

How much does title insurance cost?

The cost of title insurance varies depending on the type of policy you want. Owner's title insurance costs less than lender's title insurance, for example. This can make sense for people who have never had a house before or don't plan to borrow money from a lender in order to buy a home. The cost is relatively low, but it can be worth it if you want peace of mind. There are also other circumstances that might require lender's title insurance, such as refinancing or taking out a home equity line of credit. Homeowners typically only need owner's title insurance when they purchase a new property. 

Since lenders often insist on having their own independent inspection of the property, they may charge more than homeowners would pay when they insure their own property. 

If you're not sure what type of coverage to get, talk with an agent about your needs and how much coverage will cost you.

 

Do I need an owner's policy and a lender's policy?

Lender's title insurance is an insurance policy, that your lender if you use a financial institution, to borrow money in order to consummate the transaction requires you to get to ensure the lender's security interest in the property that you're buying. And what you're insuring against is, in essence, titled defects, whether there be boundary disputes, or the description of the property isn't quite what everybody understands it to be, or someone else lays some sort of claim to your property, the insurance company, which is a title insurance company, and we have a few here in Rhode Island who write the bulk of the policies. The insurance company provides a policy and the insured on the lender's pilot policy is the back. And the value of that title insurance policy is at inception, the loan that you receive in order to purchase the property. So as you pay down the loan, the value of the title and insurance for the lender goes down. 

By contrast, the owner's policy, which is optional, as a buyer here in Rhode Island, is very similar, but ensures you as a buyer against those same types of title defects. It's a separate policy, and the buyer would be named as the insured on that policy. The value of that policy is the purchase price of the property, which is probably in almost all instances going to be higher than your loan and your loan policy amount. And the value of that owner's title insurance policy increases presumably as the property appreciates in value over time. And again, as the buyer, you are the insured under that policy. 

 

How can I get title insurance?

The first step to getting title insurance is to determine whether you want owner's or lender's title insurance. Once you've decided what type of coverage you need, it's time to find a company that provides title insurance. You can do this by going online, reading reviews for different companies in your area, asking friends for recommendations, and contacting local real estate agents. You will also want to ask about the cost of the title insurance policy before choosing one company over another. For example, if you're an owner and only want a small amount of protection against future lawsuits because your home isn't worth much, then you may be better off with an owner's title insurance policy from a company that offers lower rates. On the other hand, if you're a lender who needs protection for several loans on one property, then a lender's title insurance from a well-known company may be more appropriate.

 

Is there anything else I should know about title insurance?

Title insurance protects you in the event that your homeowners' title is challenged by someone else. You may be paying for something that you don't need or want, but it's better to be safe than sorry. Title insurance is an important part of the home-buying process, so make sure to include it when negotiating your purchase price.

As always, if you have any questions, please reach out to us at Greenwich Bay Brokers. We'd be happy to help you simplify the homebuying process!

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