10 things homebuyers should know about title insurance
You have the right to choose your title company. In an industry contaminated by affiliated business arrangements, kickbacks, and other referral incentives, the Internet returns the power to the people. Don’t let your mortgage lender or real estate agent steer you toward their preferred title company without doing your homework first. You could save thousands of dollars – yes, thousands – by selecting a title company on your own.
It’s easy to save money on title services. Ask for quotes from several title companies and compare them with your real estate agent’s or mortgage lender’s recommendation. By shopping around and asking about discounts, a lot of times the home buyer can save thousands on closing costs.
Your mortgage lender will require title insurance. This isn’t one of those cases where you can skirt the extra expense and hope for the best. If you are borrowing money for a real estate investment, your mortgage lender will want to make sure it’s protected. Title insurance protects your money if it turns out the seller didn’t legally have the right to sell the property in the first place. At a minimum, you will be required to purchase a lender’s policy. An owner’s policy, while recommended, is not required. To save money on your owner’s policy look into Standard v. Extended coverage.
Title insurance is a one-time fee. Unlike other types of insurance, there is no ongoing premium to pay for title insurance. Your mortgage lender is required to provide you with a Good Faith Estimate for closing costs, including title insurance, and factor those costs into the initial disclosure. This three-minute video explains closing costs in laymen’s terms: Closing Costs Explained Visually.
Ask about “standard” title insurance vs. “enhanced” title insurance. Some title companies push enhanced title insurance without providing the consumer with a proper disclosure that a less expensive standard policy is available. For many home buyers, a standard policy will suffice. It costs less, too. Compare standard vs. enhanced title insurance, and make sure to ask your title company what types of insurance products they offer. Talk with your lender and settlement attorney to determine what policy is appropriate for your home investment.
Who pays for title insurance depends on where you live. Sometimes it’s the buyer who pays, sometimes it’s the seller. And sometimes the cost is split between the two. In the Washington Metro Area, for example, title insurance premiums are generally paid by the home buyer. It’s important to note that title insurance is regulated largely on the state level. If you’re conducting a little Internet research, be sure to use regional qualifiers in your search (e.g. state, county, etc.).
Some closing costs are fixed while others are variable. The cost of your title insurance policy and government recordation fees are dependent on the purchase price of your home, and the bulk of settlement costs are typically paid by the home buyer. However, the seller doesn’t get off scot-free.
Seller fees include a fee for mortgage release procurement and deed preparations. The settlement fee is often split between buyer and seller. Homebuyer fees include a title examination/abstractor fee, location survey fee and a fee to process paperwork. A title company may charge additional fees unique to each transaction, but the extent of the fees should be disclosed up front.
Settlement costs factor into your loan’s Annual Percentage Yield (APR). Home buyers should know the settlement process can be delayed due to recent changes to the Truth in Lending Act (effective Aug. 1, 2009). If the actual APR differs from the estimated APR by more than 0.125 percent, your mortgage lender must issue a new initial disclosure that reflects the accurate rate and wait a minimum of 3 business days to close the deal. To avoid surprises at the closing table, invest five minutes of your time at the beginning of the transaction to obtain a guaranteed quote online for settlement services.
If you’re planning to refinance, your lender will require a title insurance policy. There are plenty of reasons to refinance such as reducing your interest rate and mortgage payment or consolidating debt. While a new owner’s policy may not be necessary if you plan to refinance, your mortgage lender will still want to ensure the investment is protected, so you will likely need to purchase a new lender’s title insurance policy. Here is an example of a title insurance rate card for a refinance.
Referral fees increase the cost of title insurance. The Government Accountability Office recently reported that 5 percent of title insurance premiums went toward insurance claims. A far greater percentage (some reports claim 50 percent or more), went to real estate agents and mortgage lenders for referral fees. This practice is illegal and punishable by imprisonment and/or a fine, yet it’s very difficult to regulate. Home buyers’ best protection against exorbitant title costs is education, simply knowing they have the right to choose their title company, asking about discounts and learning about what options are available. Not all title companies shell out referral fees or kickbacks. In fact, some title companies cut out the middle man and credit the home buyer instead when he/she orders settlement services online directly from them.