Why is Title Insurance Necessary During a Refinance?
October 27, 2015
If you're considering refinancing your home loan to take advantage of a lower rate or more favorable terms, it helps to know about the upfront costs. If you decide to refinance your home, even through the same lender that originated your current loan, you'll likely be expected to pay closing costs such as service fees, points, and title insurance fees.
What Is Title Insurance, Again?
Just what is title insurance? This can be a hard question to answer, even for people who've bought and sold several homes (and bought several title insurance policies along the way). This is partially because buying a home is a complex process. After a while, details of the purchase and its associated fees can start to blur together. Another reason is because title insurance differs from many other types of insurance.
When you purchase car insurance or health insurance, you're protecting yourself from a possible future negative event, like an accident or health problem. Car insurance requires the continuous payment of a premium to maintain coverage on the car, just as health insurance requires ongoing payment of a premium to protect against health issues.
Title insurance works differently. When purchasing title insurance, you'll pay a one-time fee at closing for your title insurance policy. Compared to most other types of insurance, like auto and health, a title insurance policy comes at a significantly lower cost. That policy protects your investment, not from some future possible calamity, but from undiscovered past events which may otherwise jeopardize your ownership of the property.
The title of your property is your proof of proper, legal ownership. With your home likely being one of the largest purchases you'll make in your lifetime, you certainly want to make sure you own the property you've paid for.
This is where title insurance comes in. The two types of policies, the lender's policy and the owner's policy, provide protection to mortgage lenders and property owners, respectively, against unexpected problems affecting the title and ownership of the property.
Why Is It Necessary During a Refinance?
Title insurance protects a property investment at different points in the life of a property, when it's a new construction, when there is a property resale, and during refinance transactions. Each time a property changes hands, a new owner's policy can be purchased to protect the new owner's investment, but for transactions where a lender is involved, a title insurance lender's policy will always be required.
It's that last detail that explains why you'll need a new lender's policy with your home refinance. Rest assured, your lender isn't trying to pull one over on you. Even though it could be the same lender, the same property, and the same borrower (you) involved in the refinance as in the original loan, you must have title insurance to protect the lender's investment.
Whether it was six months or six years ago, a lot could have happened since you bought your home. New liens or legal judgements could have been placed on the property title and other title defects could have come to light. Your mortgage lender is able to protect its investment, and issue you a refinance loan, with much less risk, thanks to title insurance.
If you weren't anticipating buying a new title insurance policy during refinancing, you're not alone. Many homeowners are surprised by this requirement. That may have to do with common misunderstandings about what a home refinance is and isn't. A refinance loan isn't simply a revision to your initial loan agreement of either for a lower rate or different mortgage payment.
When you refinance your home, the original loan is paid off and a new refinance loan is originated. When the original loan is paid off, the original title insurance lender's policy goes with it. Without a new policy, the lender processing a refinance could be exposed to significant risk.
What About My Owner's Policy?
Here's the good news: If you purchased a title insurance owner's policy when you bought your home, that policy will remain in effect before, during, and after your refinance. These types of title insurance policies stay in force for as long as you or your heirs own the property. Unlike a lender's policy, your own title owner's policy doesn't just cover the value of your loan, it covers your whole investment in the property. So in case a title search doesn't turn up deed errors or omissions, examining records mistakes, forgeries, the existence of undisclosed heirs, or other problems, your owner's policy will still protect your property investment against these and other issues for as long as you own it.
While you may not have anticipated the added cost of a title insurance lender's policy when you decided to refinance, the purchase is a necessary requirement in order to complete your refinance. Refinance loans are new loans that require a new title insurance policy to protect the lender. Considering the significant amount of risk that would be assumed without a title insurance policy, the actual cost is significantly lower than you might expect. You may not have a choice about whether to purchase a new lender's policy, but you certainly can and should ask your lender about your options. You may even be able to save money depending on the refinance lender and title insurer you choose.