When purchasing a property, there are many costs that come with it. You have to pay for the property itself, taxes, mortgage fees, and also title insurance. Many people may wonder if they really need title insurance or not. In this article, we will explain what title insurance is, what it covers, and help you determine if you really need it or not.
What is Title Insurance?
Title insurance is a type of insurance policy that protects property owners and lenders from any financial loss that may occur due to title defects. Title defects can refer to a variety of different issues such as liens, encumbrances, judgments, and undisclosed heirs. Essentially, title insurance protects against any legal challenges that may arise from ownership of the property.
When you purchase title insurance, it is important to note that you are purchasing a policy that is effective for as long as you own the property, and possibly even beyond that. The cost of title insurance is typically based on the purchase price of the property, and it is a one-time fee that is paid at closing.
What Does Title Insurance Cover?
There are two types of title insurance: owner’s title insurance and lender’s title insurance. Owner’s title insurance protects the buyer of the property, while lender’s title insurance protects the lender in case of any title defects. Both types of title insurance provide coverage for:
What Title Insurance Covers |
Owner’s Title Insurance |
Lender’s Title Insurance |
Forgery and impersonation |
Yes |
Yes |
Fraud |
Yes |
Yes |
Liens or encumbrances on the title |
Yes |
Yes |
Undisclosed easements or rights of way |
Yes |
Yes |
Unmarketable title |
Yes |
Yes |
Survey and boundary issues |
Yes |
Yes |
Errors in public records |
Yes |
Yes |
Undisclosed heirs |
Yes |
No |
Pre-existing violations of subdivision laws or zoning ordinances |
Yes |
No |
What Does Title Insurance NOT Cover?
While title insurance covers a wide range of issues related to the title of the property, there are certain things that it does not cover. Title insurance policies typically do not cover:
- Environmental hazards such as mold or contamination
- Structural defects in the property
- Issues that arise after the policy is issued
- Boundary disputes with neighbors
- Issues that were known prior to purchasing the property
Do I Need Title Insurance?
Now that you know what title insurance is and what it covers, you may be wondering if you really need it. The answer is not always straightforward, as it may depend on a variety of factors, such as:
Where You Live
Some states require title insurance, while others do not. It is important to check with your state’s laws to determine if title insurance is required.
The Type of Property You Are Buying
If you are purchasing a property that has had previous owners, there may be title defects that were not discovered during previous transactions. In this case, title insurance can protect you from these issues.
The Amount of Money You are Borrowing
If you are borrowing a large amount of money for your property purchase, your lender may require you to purchase lender’s title insurance. This protects their investment in case of any title disputes.
Your Tolerance for Risk
If you are risk-averse, and want to protect yourself from any potential legal issues related to the title of the property, purchasing owner’s title insurance may be a good choice.
FAQ
How Much Does Title Insurance Cost?
The cost of title insurance varies depending on the purchase price of the property, the location of the property, and the insurance company. Generally, owner’s title insurance costs between 0.5% and 1% of the purchase price of the property.
How Long is Title Insurance Effective?
Title insurance policies are typically effective for as long as you own the property, and possibly even beyond that. If you sell the property and purchase a new policy, the new policy will only cover issues that arise after the new policy is issued.
Can I Choose My Own Title Insurance Company?
In most cases, you have the right to choose your own title insurance company. However, your lender may have a preference or a list of approved companies that you must choose from.
What Happens if a Title Defect is Discovered After Closing?
If a title defect is discovered after closing, the title insurance company will work to resolve the issue. Depending on the issue, this may involve filing a claim with the insurance company, or even going to court. In any case, the title insurance policy will cover any legal fees or damages that may arise from the issue.
Can I Refinance My Title Insurance Policy?
No, you cannot refinance your title insurance policy. However, if you refinance your mortgage, your lender may require you to purchase lender’s title insurance again.
Conclusion
While title insurance is not always required, it can be a valuable investment to protect yourself from any potential legal issues related to the title of the property. By understanding what title insurance covers, and assessing your own personal situation, you can make an informed decision about whether or not to purchase title insurance.
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