If you’re a first-time homebuyer, you may be asking yourself, “Hey, what is title insurance, anyway?” Once you decide to take the plunge into homeownership, it can feel like there are never-ending administrative processing fees and insurance plans that factor into the process. When you’re already spending so much money, it’s natural to feel frustrated. Especially when it feels like a good deal is just on the horizon, it might be tempting to close as quickly as possible. But that mean cutting corners on a few steps.
However, property is a big investment. With big investments come big risks. The real estate process is designed to help money and houses change hands, but there are also a lot of safeguards built in to protect sellers, buyers, and lenders. That’s where title insurance comes into play.
Title Insurance Pays for Nasty Surprises Down The Road
It’s natural to want to think the best of other people. You would sign all the right papers, have never been foreclosed on, and your family members have wills in place to make sure their property is distributed clearly to survivors. What’s to worry about, right?
But in real estate, the history of a house or property can get messy in a hurry. It’s not just you or the seller you have to worry about. It could be the person the seller bought the property from, or the person before them. If just one person in that entire chain of owners did not do their due diligence, your ownership could come into question.
That means your house might not actually be your house.
Title insurance pays for any future problems that an in-depth title search may have missed. It covers fraud, messy wills, unsigned paperwork, legal troubles (such as liens), and recording issues.
Lender’s Title Insurance vs. Owner’s Title Insurance
When we talk about title insurance, there are two kinds we are generally referring to. Lender’s title insurance protects the institution that is lending you the money for your new home or property. It is required, and usually costs about $1300-to-$2700. In some cases, it can cost as much as $4000.
Owner’s title insurance is generally optional, but the important thing is that it protects you from the same things. This could keep you from being displaced from your home or spending a lot of money down the road (out of your own pocket) to help resolve a dispute that could have started decades ago. Long before you saw that “For Sale” sign on the lawn and dreamed of moving in.
Owner’s title insurance is usually available for a relatively small add-on, if you’re going through the same company. Since the fee itself covers the administrative work that goes into investigating the property for any irregularities, it makes sense to bundle them together so you’re only paying for the process once. Since you have to go through this process for the lender anyway, paying the extra fee for owner’s title insurance becomes a simple investment in time, money, and security.
But Do You Need It?
If you’ve purchased an expensive gadget recently, you likely understand the dilemma. When you are already paying a lot for something, it can be tempting to cut costs towards the end of the process. When you’ve just purchased an iPad Pro for $1000, you may question whether you really need the extra protection plan for $150 (or the $75 protective case). Sure, it covers all of the bad things that may happen to a brand new piece of equipment the second you buy it, like accidental damage and theft. But when you’re already spending that $1000, $150 feels like a lot.
You don’t want to bring that same logic to the purchase of a piece of property though. The average single-family home costs $261,600. Or exactly 2616 times the cost of that iPad over the lifetime of your mortgage. You probably put down a down payment of around $50,000. Furthermore, you want this piece of property to be a lasting investment. It may be the site of a future construction or subdivision or it may just be your home. Regardless, you selected it not just because of its price, but also its convenience to work, school, or nearby family and friends. You don’t want to have to give all that up if some problem emerges down the road, especially if it will only cost you about $500 (or less) to fix.
Buy owner’s title insurance. Never ever go without it. You may never need a lifejacket, but you’re glad the ferry has them under the seats.