Title insurance protects the lender and yourself from any future issues with the title. Before you close on your loan, the title company performs a title search. This search determines that there are no liens on the property. It looks at the chain of title and the subsequent releases. In other words, it makes sure that no one can stake a claim on the property before you buy it.
What happens when you take out some of the equity of the home? If you use a home equity line of credit, do you have to pay for title insurance again? The answer is that it depends. Many lenders require it simply because any number of things could have changed on the title since you bought the home.
Property Issues That Could Occur
Even if you are the only owner of a property, there could be issues that you don’t know about. For example:
- Unpaid taxes that turned into liens
- Unpaid child support that turned into liens
- Mechanic’s liens for unpaid contractors that worked on your property
If any of these issues are apparent on your title, it could prevent a lender from getting paid what they are owed if you sell the home. Tax liens, child support, and mechanic’s liens all take priority.
What is Title Insurance?
Title insurance ensures that you will not suffer financial ruin as a result of any liens or defects to the title. The title company first conducts a title search. If the search comes up clean, then the title company will issue title insurance. There are two types of insurance:
- Lender’s policy – This policy protects the lender. However, you pay for it. This insurance does not protect you. It protects the lender’s investment in the property should a problem arise down the road. This insurance is required. It is only good for as long as you have the loan.
- Owner’s policy – This policy protects you, the owner. It is good for the entire time you own the loan. This insurance is not required, but helps protect you if a claim arises down the road.
What is a Title Search?
The title search determines who legally owns the property. It helps you determine if the seller has the rights to actually sell the property. It also ensures that you get 100% of the rights to the property as the buyer. The title company conducting the search must have jurisdiction in the area. No title company will provide title insurance without doing a title search first.
A few of the key things the title search looks for include:
- Taxes – Are all taxes paid on time? Are there any unpaid taxes? Are there any special assessments and are they paid?
- Chain of title – This shows the history of ownership of the home. It shows who owned the property and sold it. It also shows who bought the home with each transaction.
- Judgments – Are there any judgments that remain unpaid or unsatisfied?
Whether or not a lender requires title insurance for a HELOC varies by lender. In general, lenders benefit from the policy in the event that something comes up down the road. If the lender does require a policy, you will be responsible for the charges, usually paying them at the closing. If you use the same title company as your first mortgage used, you may be able to secure a reduced rate.Click to See the Latest Mortgage Rates»