Do I Need Title Insurance for a Refinance of My Own Home?
Title insurance represents a significant closing cost, especially in a refinance where there is no buyer or seller who might pay part of the costs. There are two types of title insurance policies: owner's policies and lender's policies. Your lender is going to require a lender's policy as a condition of the loan. You do not need a new owner's policy, however, because the one you already have remains in effect.
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Lender's Policy
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A lender's policy protects the lender. The title company searches the property title to make sure there are no liens or other encumbrances -- or limits -- that would represent a diminution of the property's value or that there is no question as to who really owns the property. If any problems show up, it discloses them to the prospective buyer so that they may be resolved before purchase and before the lender commits to the loan. If no problems show up and the title company issues a title policy, it is responsible for any title problems that may crop up later but actually occurred before the title policy was issued. For example, if the home was sold by a son who had inherited the property but a missing heir shows up several years later, the title company will be responsible for defending title on behalf of the lender, and it would have to pay any judgment or settlement as well as legal costs. During a refinance, you may know that no issues affecting the title have arisen since you bought the property, but a lender will only know that after it has secured a title policy.
Owner's Policy
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An owner's policy does the same thing a lender's policy does, but it protects the owner's equity in the property. A lender's policy will not protect any of the owner's equity should a title problem arise with title after sale. An owner's policy remains in force forever, so if you are refinancing you do not need to purchase a new owner's policy. If, for instance, you bought your property from a man who had been married when he owned the building and his now ex-wife never issued a quitclaim deed but instead came back to claim part of the property after you bought it, you would be covered by the owner's policy you purchased upon sale. This policy remains in effect after a refinancing. The only benefit to obtaining a new owner's policy during a refinance is if you would feel better knowing you have a policy that was researched and covers you from the date of the refinance as opposed to the date of purchase.
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Reissue Discounts
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Some title companies will give you a discount on a new lender's policy if that company issued a previous policy within a limited period in the past. This is referred to as a "reissue" discount. When you plan to refinance, call up your title policy issuer and ask about a discount. If it doesn't offer a discount and you look for another company during the refinance, make sure you ask upfront if that company has a reissue discount. You never know whether you might refinance again.
Shop Around
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Your mortgage broker or lender may steer you toward its preferred title company. That may work for you, but you will be better served by first getting a reissue quote from the title company that issued your last policy and, if that doesn't work out, shopping around to get the best price. Sometimes real estate brokers get discounts from title companies they send clients to. Try contacting the agent who sold you your house to explore that option as well.
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