Unlike other insurance that protects against future events, title insurance protects against problems from the past—issues with property ownership that existed before you bought the home but weren't discovered until later. A forged signature in the chain of title, an unknown heir with a claim, or a lien that wasn't properly recorded could threaten your ownership years after you've moved in. Title insurance covers these risks.
What Title Insurance Covers
Before closing, a title company searches public records to verify that the seller has clear ownership and the right to sell. They look for liens, easements, judgments, and anything else that could cloud the title. But record searches, however thorough, can't catch everything. Some problems only emerge later.
Title insurance covers issues like: forged documents in the chain of title, errors in public records, unknown heirs who emerge to claim ownership, liens that weren't properly recorded, boundary disputes that weren't discovered, and fraud or impersonation in previous transactions. If someone challenges your ownership based on a covered issue, the title insurer defends your rights and covers losses.
Two Types of Policies
Lender's title insurance protects the mortgage lender's interest in the property. It's required for virtually all mortgage transactions and typically paid by the buyer. The coverage equals the loan amount and decreases as you pay down the mortgage, reaching zero when the loan is paid off.
Owner's title insurance protects your interest as the property owner. It's optional in most states but highly recommended. You pay a one-time premium at closing, and coverage lasts as long as you or your heirs own the property. The cost is typically 0.5% to 1% of the purchase price—a few thousand dollars for permanent protection.
Some buyers skip owner's coverage to save money. This is risky. The lender's policy only protects the bank, not you. If a title problem emerges, the lender is covered but you could lose your equity and be responsible for legal costs. The one-time premium is small relative to the protection it provides.
When to Buy Title Insurance
Title insurance is purchased at closing as part of your closing costs. You'll work with a title company (often the same one handling your escrow and closing) who conducts the title search and issues the policies.
In some areas, title insurance costs are negotiable or traditionally paid by one party or the other. Ask your real estate agent about local customs. Regardless of who pays, make sure you're getting both lender's and owner's coverage.
If you refinance, you'll need a new lender's policy. Some title companies offer "reissue rates" if you're refinancing within a few years of purchase, reducing the premium. Your owner's policy remains in effect from your original purchase.