Written by Robert J. Bruss, reprinted from the Union-Tribune
When you bought or refinanced your home, did your mortgage lender require a lender’s title insurance policy? Since virtually all mortgage lenders require title insurance, except perhaps a few who are unaware of their high risk, the answer is almost surely yes. Today, more than 50 percent of home loan originations are refinances. Although home sellers sometimes pay for title insurance, when a home mortgage is refinanced, it’s the homeowner’s responsibility to buy the lender’s title insurance policy. Most homeowners feel title insurance is a waste of money.
Have you ever heard of a homeowner having a title claim and collecting from the insurer? It’s virtually unheard of.
There are two types of title insurance policies.
Before considering the pros and cons of title insurance, it’s important to understand the difference:
Lender’s title insurance:
Virtually every institutional mortgage lender requires a lender’s title insurance policy (paid for by the borrower, or sometimes by the home seller). No lender’s title insurance policy, no loan is every lender’s motto. However, lenders are flexible and usually let the borrower choose the title insurance company. A lender’s title policy protects the lender against title risks such as forged signatures in the chain of title (the major cause of title insurance losses), recording errors, mistakes in deed indexing, unpaid real estate taxes and other recorded liens, defective foreclosures, title search errors, undisclosed easements, and even title claims by missing heirs and ex-spouses. If a survey is made, it is also insured.
Homeowner’s title insurance:
The homeowner’s equity is insured by the second type of title insurance, which protects the owner as well as the owner’s heirs. At the time of home purchase, equity is often very small (especially with a zero down payment home mortgage). But as the owner’s equity grows by payingdown the mortgage, the homeowner’s policy protection slowly increases. For a one-time title insurance premium, the homeowner’s equity is protected from title risks up to the policy limit.
Again, the major title risk is forged signatures, such as an ex-husband who forged his ex-wife’s signature on a deed, but there are many other insured owner title risks. Some homeowners don’t buy owner’s title insurance, reasoning – If the title insurer issued a lender’s title policy, the title must be all right, so I’ll save a few dollars and not insure my equity. This may be false economy because when a title loss occurs, the lender’s loss will be paid, but the homeowner could lose the entire equity.
Is title insurance really needed again when refinancing?
Homeowners who refinance either to lower their interest rate or take out tax-free cash often question the fee for a new lender’s title insurance policy.
Even if you bought or refinanced your home just a year or two ago, many events could have occurred to impair your title. To illustrate, perhaps you incurred a mechanic’s lien because you didn’t pay the plumber who unclogged your drains. Or, maybe the IRS recorded an income tax lien. Perhaps the property taxes weren’t paid on time. Worse, suppose a creditor obtained a judgment against you and recorded it. All these situations might have impaired the title to your home, thus requiring a new lender’s title insurance policy. In many states, if you ask when refinancing, most title insurers will give a discount from the normal lender;s title insurance premium if a title policy was issued within the last few years.
Why title insurers rarely pay claims:
If you, or your mortgage lender, have had a title insurance claim, or if you have ever heard of a titl insurance loss, you’re in the minority. The American Land Title Association reports less than 10 percent of title insurance premiums are paid out to lenders and property owners on title claims. This is a very low percentage, compared to other types of insurance.
But there is a good reason. Title insurers spend most of their premium dollars collected on researching property titles before insuring them. The result is most of their expense is for title research rather than loss payments. However, even the world’s best title searchers can’t prevent some title losses, such as forged signatures on deeds. Also, title searchers make mistakes, such as overlooking properly recorded underground sewer easements. For example, several years ago a title loss occurred near where I live because the title insurer didn’t tell the homeowner about a sewer pipe under the back yard. When a swimming pool excavator discovered the city sewer line practically in the middle of the backyard, the homeowner filed a title claim. The title insurer completely missed the recorded sewer easement and had to pay the homeowner for the diminished value of his residence.
In summary, the two types of title insurance protect both mortgage lenders and property owners. Although title insurance isn’t necessary to acquire real estate, virtually all mortgage lenders require it.
For a modest one-time additional title insurance premium, home buyers with owner’s title policies can be assured their titles will be protected against loss from virtually all foreseeable title loss risks. Title insurance is peace-of-mind insurance against rare but potentially expensive title losses.