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Erik J. Martin
Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment.
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Troy Segal is a senior editor for Bankrate. She edits stories about mortgages and home equity, along with the finer financial points of owning and maintaining a home.
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Robert R. Johnson, Ph.D., CFA, CAIA, is a professor of finance at Creighton University and chairman and CEO of Economic Index Associates, LLC.
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For many people, a home is the biggest thing they’ll ever buy — and the last thing anyone wants is to encounter unexpected ownership issues after completing the purchase. This is where title insurance, a crucial policy for homeowners, becomes essential.
Title insurance safeguards both mortgage lenders and homebuyers against potential problems with a property’s deed following the transfer of ownership. In the event of a title dispute arising during or after a sale, the title insurance company may be liable for covering specified legal damages, depending on the terms of the policy.
Let’s look at what title insurance is, the different types of title insurance policies, and why and when a homebuyer needs it.
The title of a property refers to the legal rights the owner holds to the property. When purchasing a home, it’s crucial to ensure the property has a clear title and is free from liens or other ownership claims. Failing to do so could leave the new owner responsible for resolving these issues — unless they possess title insurance.
Title insurance comes in two varieties, both paid as an upfront charge when you buy a home: a lender’s policy and an owner’s policy.
When securing a mortgage, lenders typically require borrowers to obtain what’s called a lender’s title insurance policy, also known as a loan policy. This policy protects the lender in the event of property ownership claims. Often the lender chooses or recommends a title insurance company for you, and includes their fee on your loan estimate. This premium is typically paid during the closing, though it could be requested upon signing the purchase and sale agreement.
Owner’s title insurance is a separate policy. Usually optional but recommended, It serves to shield the buyer from any ownership claims. It’s usually purchased at the same time as the lender’s insurance, but definitely by the time you take possession of the home.
Obtaining title insurance typically involves two stages.
First, a title company performs a title search, to verify that the home seller in fact holds legitimate ownership of the property and the right to sell it. the property you intend to purchase possesses a clear title. Should any defects or issues arise, the title company will inform you accordingly.
Following the completion of the search, the company evaluates any identified issues, and subsequently provides a quote for a title insurance policy based on the associated risks. In cases where a title exhibits numerous defects, the company may opt not to offer a policy.
Title insurance protects both the lender and the homebuyer against the need to address defects with a property’s title, which may include:
For instance, say you purchase a property from the estate of a deceased individual, and an unknown heir later asserts ownership, alleging that it was improperly sold to you. Title insurance can be invaluable here. The title search process would have likely turned up evidence of the heir before the transaction closed. However, if it didn’t, title insurance would assist in covering the expenses associated with resolving the heir’s claim.
What can you expect to pay for title insurance? Let’s assume the current median price of a home — $417,000 as of Q4 2023, per the Census Bureau and HUD — and you’re making a 15 percent down payment (the national average down payment, according to Realtor.com data). That means your mortgage is $333,600. So a lender’s title insurance policy would cost you around $1,167 assuming the average rate of $3.50 per $1,000 (or $350 per $100,000) of loan principal.
Using the same $417,000 sale price hypothetical above, an owner’s title policy, on the other hand, would likely set you back about $1,042, based on an average rate of average rate of $2.50 per $1,000 ($250 for every $100,000) of the home’s sale price. That equates to an average rate of 0.25 percent of a residence’s sale price.
So: a total of $2,209. On average, title insurance can range from collectively costs 0.5 percent to 1 percent of the home’s sale price (including both kinds); the average cost 0.67 percent of the purchase price, according to Megan Hernandez, director of public relations & marketing for ALTA.
Title insurance policies protect both you and the lender against legal disputes and liens regarding property ownership. If you’re financing your home purchase, you don’t really have a choice: Most mortgage lenders require homebuyers to obtain a lender’s title insurance policy. (It protects them, but you buy it: paradoxical but true.)
Obviously, if you’re buying a home with all cash (or financing in some way other than a mortgage), you won’t need to buy lender’s title insurance.
As for the owner’s title insurance: You should probably get it. While the expense may not initially appear justified, remember, it’s a one-time charge, whose protections are good for as long as you own the home. If you don’t purchase owner’s title insurance and an issue turns up in the future, you’ll likely be responsible for correcting it, which can be costly (the lender’s policy only protects the lender). For example, if the previous owner had unpaid property taxes, the municipality might place a lien on the property, which can’t be removed until the back taxes are paid.
While your lender or real estate agent may suggest a specific title company, you are not required to use it. You have the option to acquire a lender’s title insurance policy from a company of your choice. Additionally, you might prefer to engage a different company than the one chosen by the seller to conduct the title search.
Some states regulate title insurance prices, but others allow a free market; shopping around is especially important if that’s the case. Even if costs are fixed, though, comparisons can be useful and educational. Of course, you may discover that your lender’s affiliated company offers the most comprehensive coverage or competitive pricing.
In essence, it’s essential to choose a reputable and established company that you can rely on for years to come. When evaluating different providers, don’t hesitate to inquire about any past claims they’ve handled and whether they have adequate insurance coverage for their business.
Furthermore, inquire with the title company about potential discounts you may qualify for. Some companies offer programs tailored for first-time homebuyers or other incentives to help you save money.
The specific laws and rules regarding who is responsible for paying for title insurance will differ from state to state and even, in some instances, from county to county. However, lender’s title insurance is typically paid for by the buyer, while an owner’s policy can often be paid by either the seller or buyer. In some instances, sellers and buyers split the cost of title fees, including owner’s title insurance. A seller may want to pay this expense on behalf of the buyer to make their listing more attractive.
Title insurance usually costs 0.5 percent to 1 percent of the property’s sale price. Lender’s title insurance is based on the mortgage principal amount, about $3.50 for every $1,000 of the loan. Owner’s title insurance is often a few hundred dollars: specifically, $2.50 for every $1,000 of the home’s purchase price, according to First American.
You can possibly save money on title insurance by purchasing both the lender’s and the owner’s policy together from the same company. Called a “simultaneous issue rate,” it can come with a lower premium amount for the lender’s insurance policy.
Arrow Right Contributor, Personal Finance
Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment.
