6 Common Myths about Title Insurance
Dec 13, 2022 | Title Insurance | Share:
Most people don’t think about title insurance that often. In fact, many outside the real estate or title industry may struggle to give you an accurate definition of title insurance. And that’s okay: the average individual doesn’t need to think about title insurance. But they do need to be protected when buying a new home.
Unfortunately, a limited understanding has led some people to believe some common myths about title insurance, leading them to opt out of this protection. While choosing to purchase title insurance is an individual decision, it’s important for everyone to know the truth about title insurance to make an informed choice.
We’re tackling six of the most common myths about title insurance so that you can separate fact from fiction when making decisions about title insurance coverage.
Myth #1: Not everyone needs title insurance
While not everyone will need to make a claim on their title insurance, owner’s title insurance is always a good idea. Not everyone makes claims on their auto insurance either, but most people don’t think twice about having insurance for their cars. In fact, all states require at least some level of automotive insurance coverage.
While owner’s title insurance isn’t required, lender’s title insurance is required for individuals who purchase a home through a mortgage loan. However, a loan policy protects only the lender’s interests while offering no protection to the homeowner. But if it’s required by the lender, doesn’t that sound like something that would be beneficial for the homeowner to have as well?
Title insurance protects ownership rights for what is, for many people, their largest investment. Not only can title claims be costly, but they can also threaten a homeowner’s ability to own, use, and sell their home. Standard owner’s title insurance covers the most common hidden risks to the title while enhanced coverage extends to other less common (but still potential) risks.
In the event of a title claim, owner’s title insurance covers the cost of resolution as well as any associated legal fees. Additionally, the insurance provider will handle all of the details, freeing the homeowner from hassle.
It’s true, owner’s title insurance is an individual choice. No one will require you to purchase owner’s title insurance at closing, but it’s important to make an informed choice about your title insurance coverage.
Myth #2: Title insurance is overpriced
Believe it or not, title insurance is one of the most affordable types of insurance you can buy. Purchased as a one-time premium at the time of closing, owner’s title insurance is effective for the entire time you (or your heirs) own your home with no additional monthly payments.
Standard owner’s title insurance costs far less than 1% of the home’s total purchase price. Compared to the cost of resolving most title insurance claims, owner’s title insurance is a very small investment. While no one wants to add more costs at closing, it’s hard to put a price on the peace of mind that title insurance coverage can provide.
To get an idea of how much standard owner’s title insurance will cost in Alabama, you can check our rates calculator. This calculator provides estimates for both the owner’s and the lender’s policy for financed purchases up to $1 million. (These estimates do not include other closing costs.) Information about rates in Tennessee and Florida is coming soon.
Myth #3: All title companies are the same
Title insurance is, in fact, a bit of a commodity. If you’re purchasing title insurance from a reputable underwriter, it’s going to provide protection against hidden risks to the title. But that doesn’t mean that it doesn’t matter which title company you use.
The title company you choose will depend on your needs, but you should always choose a reputable title company that has an ALTA membership and uses a national underwriter. You can also verify its legitimacy by checking Google reviews and talking with other realtors.
But the companies that provide title insurance are very different from one another. Some are small, single-location companies with only a few employees. Others are larger organizations with several locations. Regardless of the size of your company, you want to ensure that you’re choosing a title company that prioritizes good customer service and communication.
Your closing is often with your title company, so you want to choose one that’s going to treat clients well. You should expect outstanding customer service and support from your title company, so don’t be afraid to shop around for one that will take care of you and your clients throughout the entire title and closing process.
Myth #4: Title insurance isn't needed for newer homes
While older homes may have a longer chain of title, there are still plenty of hidden risks to the titles of newer homes. You may even be surprised to learn that title issues can impact new construction.
Even if a home is newer and has a shorter chain of title, it can still have all kinds of title issues. For example, it doesn’t take decades to accumulate liens, and smaller liens such as unpaid HOA fines or sewer charges can still be discovered after closing.
Remember that title insurance provides coverage for your entire property, not just the home itself. New construction can still have title issues: the home may be new, but the land it’s on is not, and may have changed hands several times. Mechanics liens can also impact new construction.
The same hidden risks to older homes can exist for newer homes and land, including filing or clerical errors or undiscovered liens. Regardless of the age of your home, it’s always a safe bet to have owner’s title insurance in addition to your loan policy.
Myth #5: You don't need title insurance if you have homeowner's insurance
To the uninitiated, title insurance and homeowner’s insurance may seem very similar. They both seem to offer coverage to your home, and many people don’t think of their ownership rights as something that may be under threat.
Although homeowner’s insurance has the name “owner” in the title, it does nothing to protect your ownership rights. While it does protect you from damage to your home or property that can impact your ability to use or live in the home, such as storm or fire damage, your ownership rights are never under threat. Owner’s title insurance protects your right to own, control, use, enjoy, and sell your property at will.
Homeowner’s insurance and owner’s title insurance are different in other ways. While title insurance is paid in a one-time premium at closing, homeowner’s insurance is paid annually. Owner’s title insurance is in effect for the entire time you own your home, while homeowner’s insurance is only effective as long as you are paying the premium. Additionally, there is no deductible for title insurance claims, while most homeowner’s insurance policies require a deductible to be paid when filing a claim. The cost of your title insurance coverage does not increase when a claim is filed.
Myth #6: A title search eliminates the need for title insurance
A title search does enable the title company to present a clear title at closing so that the homeowner can close without a cloud on their title. Unfortunately, the title examiner can’t predict the future and can’t know what they don’t know. They can only examine the abstract that they have and the available records, and it’s impossible for them to know whether a document has been forged or misfiled, or if a lien will show up after closing. There will always be potential hidden risks to the title, even with the most thorough title search.
You shouldn’t gamble with title insurance. Although most homes will never have any title issues, the relatively small cost for title insurance at closing can give you the peace of mind that these issues will be dealt with on your behalf if they do arise.
While the decision to purchase title insurance is always up to the individual buyer, some may choose not to purchase coverage because they don’t fully understand the benefits or are believing a myth about title insurance. Make sure you have the facts straight about owner’s title insurance before opting out.
At South Oak, we treat every file with care and provide individualized service for each of our clients. Contact us with your questions about title insurance, or order a title and schedule a closing today.