Let’s be honest: real estate investing can be complex, especially when it comes to the paperwork associated with buying & selling property.
So when you see the costs associated with title insurance, is it something you should pay for … or can you save a few bucks by going without it?
It’s a big question.
Not only does it depend on the specific real estate transaction; it also depends upon your knowledge of title insurance.
In this article, we’ll break down everything you need to know about title insurance so that, during your next transaction, you can make a decision that’s best for you.
What is Title Insurance?
Title insurance is a unique type of insurance coverage that applies to real estate transactions. What makes it unique is that while most insurance protects against future events, title insurance helps protect you from the past.
Why would you need to protect yourself from the past?
I’m glad you asked!
Because real estate is a sector where past discrepancies have the potential to threaten your legal claim of ownership over your property.
It’s a one-time purchase that is typically made at closing, and it lasts as long as you have an interest in the property.
Your title insurance will defend against unforeseen issues like undisclosed heirs, forgery in the history of the property, or even clerical errors in public records.
This ensures that your right to the property is clear and unchallenged.
In this sense, title insurance may just be your only protection against such claims or issues.
What Does Title Insurance Cover?
Title insurance acts as a layer of protection against a range of legal challenges to your ownership.
It addresses issues that may not even be apparent after substantial public records searches.
This includes:
- Fraud
- Forgery
- Undisclosed Heirs
- Legal property description mistakes
- Tax liens
- Legal fees to resolve opposing claims to the property
When You Need Title Insurance …
In short, you should consider title insurance to be an essential element of any new property purchase or when refinancing a mortgage.
In transactions like these, it’s going to protect against past title defects that may pose an impediment to your ownership rights.
For buyers, title insurance guarantees the property title is free and clear, so the ownership transfer is as smooth as possible.
For lenders, it ensures that their stake in the property is protected against issues related to the title.
If you’re investing in real estate, getting title insurance is always a prudent step.
And When you Don’t Need Title Insurance…
Even though title insurance is critical in many situations, there are some transactions where it may not be that necessary.
For instance, if you inherit a property, or receive one as a gift from a family member, provided it has a clear, known history, the resulting risk of potential title issues will likely be minimal.
Also, if you’ve researched the property thoroughly enough and are confident in its history and clear title, such as a property that has been in the family for multiple generations without disputes, you could reasonably forgo the insurance.
The smartest move would be to consult with a real estate attorney about the decision after considering the risks to get their input.
Make sense?
How Much Does Title Insurance Cost?
Ah yes: the cost.
How much will title insurance set you back?
The cost is generally proportional to the value or purchase price of the property. The higher the price, the more costly the insurance is likely to be.
Some areas use fixed rates for title insurance, while other areas may allow the market to dictate the price.
In areas with market prices, you may be able to leverage one insurer over another for a better price.
Lenders vs. Owner’s Title Insurance
Wait a second … title insurance may sound similar to lender’s title insurance.
Let’s pause for a second and make sure we know how they are different.
Lender’s title insurance is usually required when taking out a mortgage, and it protects that firm’s stake in the property.
On the other hand, owner’s title insurance is bought by the homebuyer and protects their equity in the property.
The lender’s policy will decrease in value as the mortgage is paid off, while the owner’s policy will remain in effect as long as that owner or their heirs maintain an interest in the property.
Title Insurance FAQs
Still have questions around title insurance? Next, we’ll provide answers to some of the most commonly asked questions.
Q. Is title insurance required?
Title insurance isn’t a legal requirement for the buyer in a legal transaction, but it is very highly recommended.
If you’re taking out a mortgage though, your lender will generally require you to buy a lender’s title insurance policy to safeguard their stake in the property.
Q. Can you negotiate title insurance?
The price of title insurance will generally depend on the state and the insurer, though there may still be some wiggle room.
Shop around and compare quotes from several different insurers before you commit, but be aware that some states have regulations regarding title insurance cost and while that may limit negotiations it can help make the pricing more amicable across the board.
Q. Is title insurance a waste of money?
Considering the amount of money involved in the average real estate transaction, a small additional cost to help protect the entirety of the investment doesn’t seem like a waste to me.
It provides significant protection by covering the legal fees and other expenses associated with defending the title for your property.
The Bottom Line: Title Insurance
Anyone who has been in the real estate sector for any amount of time knows that the landscape of transactions can be complex.
Title insurance is a critical safeguard that helps protect your investment not only from past transactional anomalies but from potentially costly future legal battles.
While in some cases it might seem like an extra expense that just isn’t worth it at the time, the protection it offers can save you from unforeseen and possibly financially devastating legal issues down the road.
There’s enough risk involved in real estate investment already, and given the stakes, why increase that risk?
Title insurance is more than just another closing cost, it’s an incredibly strategic expense that can safeguard your entire investment, as well as your peace of mind.
