A big percentage of closing costs on purchase and refinance loans is title insurance. So here’s a quick primer.
On a purchase, the borrower must buy two title insurance policies: one to protect them as the owner of the property, and one to protect the lender they’re using. All lenders require this.
On a refinance, the borrower must buy title insurance to protect the lender. This is true even if you bought your home recently and paid for the lender’s policy at that time. You need a new policy to be matched up with that new loan.
In short, title insurance protects you and your lender from any claims anyone can come along and make on your title after you’re the owner of the home.
The owner’s policy runs for as long as you own your home, and the lender’s policy runs for as long as that loan is in place.
Examples of claims might be someone making a claim to having use to your driveway. Or an old claim from a contractor who never got paid for work done to the home before you even owned it.
The latter example is settled at closing by your title company, because most lenders won’t make loans on properties with open liens—including contractors and tax liens. But it’s still worth noting because the insurance would cover it if it came up later.
When you’re doing a home purchase or refinance loan, your lender and realtor are typically the first to brief you on title insurance details and fees, and to recommend a good title/escrow officer who takes it from there.
For further reference, below is a video that explains title insurance. Thanks to Megan Sorensen at First American Title for the link.