Title insurance: What exactly is it, and why is it necessary?
Let’s break down what title insurance is and why you will run into it on your next sale or purchase.
Title insurance is simply what the name implies: insurance that a clear chain of title exists on the property that is passing from one owner to the next. The fees associated with title insurance are paid to ensure that any costs associated with a claim on the title after closing will not come out of your pocket.
One form of title insurance, “lenders” coverage, is designed to protect (who else?) your lender in case of title problems. “Lenders” coverage is required and generally provides protection up to the original mortgage amount—if you buy a home for $300,000 and get a $250,000 mortgage, then $250,000 is as much coverage as you can get with a lender’s policy. If there’s a claim, the title insurer will fight on your behalf and if there’s a claim the policy will pay off the loan if necessary. This is good news for you because you won’t owe the lender a dime if you lose in court.But there are also some options.For instance, you can also get “owners” coverage. This will protect your equity—that $50,000 in the example above not covered by the lender’s policy. And you can often get an “inflation rider” with an owner’s policy—as the value of your home goes up, so does the value of your title coverage.
At the end of the day, title insurance exists to make sure any mistakes in the chain of title (the passing of the property from one owner to the next) are resolved at a minimum of inconvenience to the parties involved.