Purchasing a home is almost certainly one of the biggest investments you will make in your lifetime. Not only this, but the entire process can be quite complex considering that you need to apply and get a mortgage and sign, what seems to be, hundreds of documents.
One of the closing expenses you have to pay when taking out a mortgage is title insurance. Even though it is a one-time premium, it is another cost on your never-ending list. Here is everything you need to know about title insurance.
What is title insurance?
First things first, let us explain what title insurance really is. In a nutshell, this document is issued by a third party, and its goal is to protect your interests in the future if any problem arises regarding the ownership of the property.
It may turn out that some previous documents are fraudulent, that the taxes haven’t been paid, or an heir may emerge claiming to own the property. If you own this insurance and some of these problems arise, the title company will deal with them.
How does it differ from other types of insurances?
Now, many people believe this document to be the same as homeowner insurance or even similar to car insurance. However, they could not be more wrong. The main difference is that these insurances protect you against future events.
For example, fire, flood, and similar home damages or accidents in the case of car insurance. Since these all cover events that may happen at some point, you pay this premium monthly or annually.
On the other hand, title insurance covers the past events that may, in any way, endanger your ownership of the property. We have already mentioned some of these, so we won’t elaborate further, and since these cannot happen in the future, you pay this premium only once when you close the sale.
What are the types of title insurance?
The next thing you need to know is that this claim has two types – lender’s and owner’s insurance. When it comes to the former, as you can assume, it protects the lender’s interests, which is the company that gave you a loan to buy the property.
Most lenders will require you to purchase this claim, and usually, its value needs to match the mortgage principal. On the other hand, there is the owner’s claim, but obtaining this one is mandatory.
However, considering that it guards your investment, it is a good idea to get it. In addition, considering that it is a one-time expense, and that is valid for as long as you own the property, there is no reason you shouldn’t have it.
How to obtain it?
Purchasing this policy is pretty easy. First, you need to find a title company, and you can choose whichever you want. The real estate agent you work with or a lender may give you recommendations, but keep in mind that you are not obliged to go with the companies they suggest.
Our advice is to do your own research. Make sure the company is licensed to issue this type of insurance. Once you find the one you would like to collaborate with, contact them, and inquire about the process in great detail. They will send you a form to fill out with all the necessary information and introduce you to all the steps you need to take.
How does it work?
Now that you have a title company and have provided them with all the details regarding the property and purchase, the company will complete two tasks. First, they will confirm that that property has a clear title. What does this mean?
Basically, it means that the person selling the house is a rightful owner and that they have the right to sell it to you. Then, they investigate if there are any potential issues and if the paperwork is valid. If they uncover any, inconsistencies they will immediately notify you and ask if you want to proceed. Finally, based on your response and their investigation, they will provide you with an estimate of how much the policy will cost.
Nevertheless, keep in mind that if they find too many disturbances, the company may decline your application. Needless to say, if this happens, it is not safe to continue with the process, and you should look for another property.
How much does it cost?
Even though the rate the companies charge is set, it goes between 0.5% and 1% of the overall value of the property. Considering the average price of a home, this expense usually goes between $1.500 and $3.000.
When it comes to the owner’s policy, its cost is based on the purchase price of the home, while the lender’s one is calculated according to the value of the mortgage, that is, the amount of money they lend you. You can check the cost yourself by using a rate calculator.
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Depending on the state, this expense doesn’t differ between companies, which is something you should consider when looking for one. Obviously, if you pay for the property in cash or don’t need a mortgage, you are not required to get the lender’s policy.
Do you need it?
Many people are in doubt of whether they should buy this insurance or not. It is understandable to a certain point since it is another expense they have to pay. Nevertheless, we would say you should go for it.
Firstly, it will protect your interests as a new owner, and the title company will resolve any issues that may arise in the future. Furthermore, not only this, but it will also guard you if you decide to put the property for sale in the future. Buyers will also conduct an investigation, just like you did, and they may find some challenges.
Owning this policy will give you peace of mind that everything will be resolved. Plus, considering that it is a one-time premium, and its cost is fairly low compared to other expenses, there is no reason you shouldn’t get it.