title insurance

Many home buyers are surprised to learn that one of their closing costs is for “title insurance.” What is title insurance and why is it needed at most real estate closings?

In simple terms, title insurance is a policy of insurance that insures the title to real property. It is different from homeowner’s insurance, which is a policy that protects against fire, theft and liability.  Title insurance can only be obtained when there is a closing on a property, such as a purchase or refinance, and the premium is only paid once, at the time of closing, not annually like homeowner’s insurance.

Many clients will ask, aren’t you doing a title search why do I need title insurance? The simple answer is that whenever a loan is involved, the lender will require that the borrower purchase a policy of title insurance insuring the lender’s new mortgage as a valid first lien (more on different types of title insurance later).  The more complicated answer is that title insurance actually only insures against what is unknown about a real estate title, not what is known.  Basically, the title insurance protects the insured, the bank in this case, against a defect in title or a lien that is not picked up by the title search.  This could be the result of a forged document, a mistake in indexing by the town clerk, an off record event that the title searcher is not aware of (such as a death not of record) or a simple mistake by the title searcher.  Any items identified by the title search, such as mortgages or liens to be paid off or title issues to be addressed, must be resolved before the title policy can be issued.

While the good news is that title insurance is not an annual expense, the bad news is that it is not cheap. For instance, a policy of loan title insurance for a $200,000 mortgage costs $750.00.  Although there are a number of title insurance companies doing business in Connecticut, they all charge roughly the same premiums and provide the same coverage, and the rates are non-negotiable.  The next blog post will discuss some of the different types of policies available and the differences in coverage.

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