A title is a document that provides proof of ownership of a property. Ownership is granted to the individual or entity specified within the document. At any given time, numerous titles may exist for a given property, but only one of them is ever active at a time. A new title is created whenever a property is bought or sold, and this new title nullifies previous titles. Usually.
“Usually” is the operative word. In some cases, one or more previous titles on a property contain errors or misrepresentations, undisclosed liens, easements, or other details that could negatively affect the current owner. Imagine it. You go through the rigorous, complex process of a home purchase, and you’ve just settled into your new home and your thirty year FHA mortgage, which requires you to pay mortgage insurance. The last thing on your want is another type of insurance, right?
Then the county informs you that the previous homeowner incurred a lien on the property. As the current owner, you get to deal with this. Have fun.
Title insurance protects you from these can of errors and mistakes. Most lenders purchase title insurance as part of every mortgage transaction to protect themselves, and they transfer this cost to you at closing. Yet few homeowners purchase title insurance for themselves.
If your lender buys it every time, this might be a sign that it’s worth having. The price of title insurance is typically 0.5% to 1% of the price of the home, paid once and for all. You don’t have to pay ongoing premiums. It doesn’t involve your credit score, your down payment amount, or other details that determine mortgage insurance premiums. It’s a simple thing, really. And it protects you forever, up to the value of the initial price you paid for your home. As your home value increases, you can pay for new title insurance each time you refinance. It’s a good system.
But claim rates are extremely low on title insurance. In other words, the scenario described above almost never happens. Do you need title insurance? If you want to live in your home as securely as possible, then yes, you do. But the risks aren’t as high as you might think. You’ll have to decide for yourself if the added protection is worth it or not.
