Penny-pinching homebuyers who scour the list of expenses on a forthcoming closing might find the line item for title insurance and circle it.
Do I really need this? Can I cut it and lower my monthly payment? What does it actually do, anyway? They’re good questions that we’ll answer here. But, as usual, it’s not a simple yes or no.
First off, let’s make sure we all know what the thing we’re trying to protect is.
Put most simply the title to a home or piece of land is the official piece of paper that certifies your claim to the property. This ascertains your right to possess and use the land or house.
But titles can be complicated. For a condominium, a title might be owned jointly. Even on a single-family dwelling, third parties might own mineral rights on the land. And if a piece of property is willed to multiple people or estates, things can get complicated quickly, as relatives have to track down second-cousin Eddie, who no one’s seen in seven years.
Title insurance protects a buyer’s title claim against such complications and against other hidden dangers, like an undiscovered lien against the property from decades ago. (Most of these are discovered with the title search before closing, but not always.) There are dozens of cases where there might be a title insurance claim by an outside party.
Types of title insurance
You should also know there are two types of title insurance. Lender’s title insurance will protect the bank that’s giving you the loan. That bank is going to insist on the insurance, and they’re going to insist that you pay for it. Since most of the money on a traditional purchase is fronted by the bank, this is the more expensive policy, and you’re not going to avoid buying it.
There’s also owner’s title insurance that covers your initial investment and the equity you build on the property. This can be waived.
But it probably shouldn’t be.
“As a percentage of the cost of real property, title insurance premiums probably average about one percent. However, when a title loss occurs, it is usually a big loss,” wrote Bob Bruss, a sage real estate attorney who, for 23 years, wrote a column addressing sticky real estate questions.
How big? Well, consider the median house price today is $271,000. The value here in Decatur, Ga., is much higher, with an average sale price of more than $650,000 in 2017. So, both you and your lender would be on the hook for a lot of money in the event of a bogus title.
That multi-thousand-dollar insurance rolled into your mortgage might get your ire when you see the line-item, but relative to the potential loss, it’s not that much money.
Think of the parallel in health insurance. Might you save a ton of money by dropping insurance? Of course. But think of the potential financial ruin if you were to get into a debilitating traffic accident without insurance. The reward — the money you save — is not worth the risk of utter financial ruin.
The largest cause of title insurance policy claims, Bruss said, is forged signatures. And as much as that may sound like intrigue, it’s more typically a spouse (or ex-spouse) forging their partner’s signature to sell a jointly owned property.
What about new construction?
But what if you’re in a brand-spanking-new house? Clearly, you’re the first owner. Surely you don’t need title insurance for that home, right?
Wrong.
Even though your house may be new, rest assured that the piece of land it’s on isn’t. Unless you’ve got a title to a new steaming chunk of rock on the Big Island in Hawaii, that land has had a chain of previous owners. The shiniest new house may be on soil that’s got the murkiest of pasts, which you and your lender will want insurance to protect against.
So, the case for title insurance for the lender and the owner is strong. But that doesn’t mean you can’t shop around or haggle for a good rate.
In some cases, an insurer will discount the premium if the property was sold within a few years before your purchase because a lot of the title risk has already been assumed by the previous owner and their insurer. If you refinance your home, be sure to ask for a discounted rate at that point. Such reissue rates are often significantly lower than the initial rate.
In any case, as you begin searching for a new home, go armed with this information. Enlist a good Realtor with a real estate team to support you. And bone up on the other real-estate terms your likely to run into in the closing documents.
And if you’re shopping in the greater Atlanta area, you can learn specifics on the Decatur housing market in Carter & Associates’ free annual Decatur Real Estate Market Report.