Do I Need Title Insurance?
Mar 30, 2020
If you’re coming here for a quick answer to the question “Do I need title insurance?” the quick answer is probably. Hear us out. First, you need to understand what it is. To most people, title insurance is just another line item buried in your closing paperwork. Your lender says you need to have it, so either you as a buyer cover the cost, or the seller does. That one is a non-negotiable. But then you have to decide whether you as an owner also want to purchase it. Both of these are one-time expenses and not added to the monthly cost of your mortgage. So how do you decide if it’s worth it?
What is title insurance?
The simple explanation is that title insurance protects those who own a property from financial loss. One of the processes that happens behind the scenes while you’re in the buying stage is that a title research company will look up the details related to the home’s title. Ideally, the person selling you the home has a “clear title,” meaning there are no liens, levies, or disputes on the title’s ownership.
For most sales, the title will be clear. So why the confusion over optional title insurance? It seems like you wouldn’t need it once you hear you’re in the clear, right? Not exactly. As anyone who has bought or sold a home knows, there are endless bureaucratic hoops to jump through and there is an outside chance that a mistake or oversight from the past could come up that would endanger your ownership. At the very least, you could be looking at time and hassle. At the very worst, loss of your home. So yes, while this is somewhat unusual, it’s far from unheard of—and that’s where your calculation comes in.
OK, but do I really need title insurance?
Title insurance protects property buyers and mortgage lenders against defects or problems with a title when there is a transfer of property ownership. If a title dispute arises during a sale, the title insurance company may be responsible for paying specified legal damages, depending on the policy.
Just like when it’s open enrollment at your job and you’re selecting whether you want the bare-bones, high-deductible plan or the gold-plated, covers-everything plan, you’re taking a calculated risk. This is a good time to speak with everyone on your buying team to gauge their opinions but the final decision is up to you.
What does title insurance do for me?
Title insurance provides great peace of mind that past problems won’t come back to haunt you. However, it’s worth emphasizing that title issues, like taxes, construction bills, and so on, that are under the buyer’s control, remain the buyer’s responsibility. Policy coverage extends backward through time from the date of closing. This is different than many other types of insurance that protect against new problems that come up in the future
How much does title insurance cost?
The good news is that sometimes you could get the seller to cover your buyer’s policy, meaning your contribution could be zero. But due to all the negotiation that goes on during the buying process, you can’t rely on that. If you decide to cover the cost yourself, costs are typically a percentage of the total purchase price and vary by area. A useful calculation is to estimate title insurance will cost 0.45% of the purchase price.
So if you’re buying a home listed at $500,000, with a down payment of 20%, your title insurance cost will likely be around $1,800. In the scheme of everything involved in the home-buying process, it can be a small price to pay for a big amount of protection.