How much is title insurance, and why do you need it?
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When you buy a home, its legal ownership hinges largely on the house title. Title problems can have significant consequences — the last thing you want is to have someone else come forward claiming ownership of your property. To avoid landing in court trying to figure out who truly has legal rights to your house, title insurance can come to the rescue.
What is title insurance?
Title insurance is just what it sounds like: insurance for your home’s title. If issues come up — say an unknown heir comes forward, or you discover a lien on the property — the insurance policy typically pays for the legal proceedings needed to sort things out.
As part of the process of securing a mortgage, a title company is usually contracted to perform a title search on the property being purchased. This means buyers should know about any issues before they close on a house. Ideally, the house will come back with a clear title, meaning no one other than the seller has a claim to ownership. Even so, mistakes happen and things sometimes get missed, so it’s smart to have safeguards in place.
Lender’s title policy vs. owner’s title policy
If you’re financing your home purchase, your mortgage lender will almost certainly require a lender’s title insurance policy to protect itself against possible claims. Don’t assume this policy extends protection to you as the homeowner — it does not. An owner’s title policy is what protects you, helping to cover the legal costs of potential title disputes. Generally, these policies are optional, but the peace of mind is worth the cost.
Who needs title insurance?
Mortgage lenders need title insurance, because they’re on the hook if something goes wrong with the home they’re putting up money for. Without this safeguard, a title dispute could mean someone else gets awarded ownership of your home. And since the house serves as collateral for the mortgage loan, that would be a big problem. Lenders typically require you to buy this protection as part of the closing process, so it’s in place right out of the gate.
Homebuyers should also seriously consider buying an owner’s title policy for themselves. Your home is likely a big part of your financial portfolio, if not the biggest, and ownership issues can be costly at best or catastrophic at worst. Your home is on the line.
What does it cover?
Generally, both lender’s and owner’s title insurance policies cover the most common disputes filed against home titles. These can include:
- Outstanding liens
- Improperly recorded deeds
- Previously unknown heirs
- Conflicting wills
- Encroachments or easements
- Forged/falsified documents
How much does title insurance cost?
The cost of title insurance depends on several factors, including what type you’re buying, the value of the house and your location.
For the lender’s title insurance be prepared to pay somewhere between 0.5 and 1 percent of your home’s purchase price. So, if you purchased your home for the national median price of $359,000, you’d spend somewhere between $1,795 and $3,590 on lender’s title insurance. As the buyer, you’re responsible for that cost; it will generally get wrapped into your closing costs.
The price of an owner’s policy can range widely. According to First American, one of the country’s largest title companies, homebuyers should budget around $250 for every $100,000 of the home’s purchase price. Using that metric, owner’s title insurance for the median $359,000 home would cost just under $900. As a homebuyer, you may be able to negotiate this cost with the seller. In some cases, buyers and sellers split the cost of title fees, including owner’s title insurance.
Some states regulate title insurance costs with legally set rates that apply to the entire state. In those locations, the title insurance cost you get quoted will be the same from any title company, but you can still shop around for the best service for your needs. In states where title insurance cost isn’t regulated, you can get multiple quotes to find the best price.
Title insurance can give both you and your lender a big hedge of protection around the legal rights to your house. The cost can vary, depending on the state you’re in and your home’s purchase price. Some states have legally regulated prices, but in others, you can comparison shop to get the best price.