The closing costs of real estate transactions often include the cost of title insurance. This specialized form of insurance protects both buyers and lenders from risks associated with a land title. In the event that a title search or future dispute jeopardizes the original purchasing agreement, title insurance covers certain losses and expenses. Understanding this type of coverage and the cost of title insurance could help you save more on your next real estate purchase.
The Two Primary Types of Title Insurance
Title insurance policies can cover a property owner or a lender. Most lenders require buyers to invest in lender-focused coverage as part of the terms of a lending agreement. While owner coverage is optional, many owners choose to invest in the coverage to offset potential dispute resolution costs in the future. Resolving a title claim can cost tens of thousands of dollars or more – a high price most land owners cannot afford to pay out of pocket.
In many transactions, title insurance flies under the radar. Home buyers sign off on the paperwork without ever exploring the impact of the policy or the total cost of title insurance. During the home buying process, take some extra time to explore title insurance recommendations, costs, and coverage to find the best deals on coverage.
What Does Title Insurance Cover?
Title insurance prevents potential title issues from financially impacting the owner or the lender. The policy will only cover issues that arise prior to the purchase of a home. It will not cover new land issues. Most policies provide coverage for:
- The title search. While title searches are not terribly expensive, the insurance policy will cover the costs of the search. A title search reduces risk for everyone involved in the transaction, including the title insurer. In many cases, a comprehensive title search identifies and resolves all outstanding issues with a property.
- Issue resolution. If the title search uncovers problems with a property, title insurance will often cover the costs of most common title issues including preexisting tax and creditor liens.
- Losses associated with issues. If a dispute involving the party arises at a later date, the title insurance policy will cover the losses a lender or owner experiences as a result of the claim. It will also cover losses associated with invalid property transfers up to the full price of the title.
- Legal costs. The policy will cover the legal fees and expenses associated with title-related dispute resolution activities.
While most policies provide similar coverage, owners should look closely at the language of an individual policy to find the most beneficial terms. Some insurers may place more stringent limits on coverage than others or charge more for the same basic coverage.
The Cost of Title Insurance
At first, the cost of title insurance may seem high. However, title insurance works differently from other types of insurance. Instead of reacting when problems arise, title insurance companies strive to prevent losses from occurring in the future. They pay a large portion of upfront costs associated with title searches and issue resolution to avoid risk in the future.
On average, the cost of title insurance ranges from $1,000 to $4,000 per policy as a one-time, upfront cost. The terms of the policy will not change unless the owner sells or refinances the home, making it a cost-effective investment for most property buyers. If, for example, you inherit a property with title insurance coverage and discover an issue with the title, the policy will continue to provide coverage.
Factors that determine the total cost of title insurance include:
The value and location of the property. Insurers look at geographical information and property values to anticipate the amount of loss associated with an unanticipated dispute.
- Access to title plants. Insurers use title plants to research and maintain information on the insured property and surrounding properties. Title plants include plat records, recorded covenants on the property, deeds, and other helpful information. These expensive and specialized record sets often show information that dates back decades or more.
- The price of the loan. A title insurer will consider the total loan amount to determine unanticipated lender losses from a future dispute.
- State regulatory practices. States regulate title insurance differently. The most common regulatory practices that impact title insurance include:
- States that recognize an oversight-only standard allow insurers to set rates independently. The state government will only intervene and hand out fines if it believes an insurer is behaving in an unfair manner.
- File and use. In states that use this standard, insurers can set and change rates as long as they file all current rates with the appropriate regulatory body.
- In states that follow promulgation practices, regulatory bodies determine and publish premium rates for the year.
- Prior approval. States that operate under a prior approval standard require insurers to present new rates proposals on an annual basis. Only changes approved can go into effect.
While many factors can affect the price of a title insurance policy, the average rate ranges remain the same. Unless you live in a state that recognizes promulgation practices, you can compare insurers and their policy terms/rates to find the best deal.
Negotiating for the Best Title Insurance Deal
To lower the cost of title insurance, consider doing some comparison shopping for both lender and owner insurance. Ask your lender for a copy of a good faith estimate for coverage and take some time to explore title insurance coverage in your state. Use the information from three or four quotes to choose an insurer or to negotiate a discounted rate from the insurer your realtor recommends. In some cases, you may qualify for a discount if you bundle both types of policies.
Some sellers are willing to negotiate closing fees to finalize a real estate transaction. Consider asking your seller to pay for title insurance as part of the terms of the deal, especially if your offer is the best a seller will get for the property in question.
Cost vs. Value in Title Insurance
While cost is important, you also want the best possible coverage for your property. Look for policies that clearly define coverage and list few exceptions to coverage. If something comes up after the title search, you need to know the title insurer will cover the full cost of your losses up to policy limits.
The cost of title insurance varies, but many homeowners will only pay one or two thousand dollars for long term coverage. Use this information to find the best deal and protect your property today and into the future.