Title insurance premiums often give home buyers sticker shock. Policies often cost thousands of dollars, and there are two policy premiums included on the typical settlement statement.
Buyers have to pay for two separate title policies, in addition to other major closing costs. Why do those buying homes have to pay twice for the same type of insurance?
Each policy protects a different party
When looking at title insurance premiums, buyers may note that one is for the homeowner and one is for the mortgage lender. Title insurance protects the capital invested in a home.
Buyers receive protection for their down payments and the equity that they accrue by making monthly payments. If an outside party makes a title claim in the future, the buyer’s policy can help them pay for legal representation and reimburse them for their lost equity if the claim is successful.
The lender’s policy provides a similar form of protection for the mortgage company. They fund a six-figure or larger mortgage with only the property to serve as collateral. If an outside party secures ownership of that property through a title claim, the lender could face catastrophic losses.
Buyers using mortgages have an obligation to purchase title insurance for their lenders. They may have the option of declining a buyer’s policy, but doing so leaves their investment at risk. Title insurance is so important that buyers generally have the right to choose the company or lawyer assisting them with the title search process.
Understanding the purpose of title insurance can diminish the frustration that comes from paying for it. Buyers can protect themselves and their lenders from certain kinds of major losses with appropriate title insurance.