Breaking Down the Cost of Title Insurance
Jan 19, 2023 | Title Insurance | Share:
For those outside the title industry, title insurance can be a bit of a mystery. Even realtors who frequently work with title companies may not be fully educated about the ins and outs of title insurance. Unfortunately, a lack of knowledge about title insurance can lead to all kinds of myths and misconceptions.
One misconception that’s been making headlines lately is that title insurance is overpriced or, even worse, just a money-making scam for lawyers. But the truth is that title insurance is an affordable and appropriately-priced form of insurance that’s important for all homebuyers.
Title Insurance Premium Costs
There are two types of title insurance: lender’s title insurance and owner’s title insurance. Lender’s title insurance, also known as a loan policy, is non-negotiable for those using a mortgage loan to purchase their home. Owner’s title insurance is optional (but recommended), and is needed since the loan policy provides no protection to the homeowner.
The cost of an owner’s title insurance premium depends on the purchase price of the home. Your local title company doesn’t set the price of the title insurance premium; instead, it’s set by the insurance underwriter for that company. That rate is then filed with the state.
The cost of standard owner’s title insurance is less than 1% of the home’s purchase price. The title insurance premium cost is a one-time fee and provides coverage for the homebuyer for the entire time they or their heirs own their home. You can use our online rates calculator to get an estimate of the cost of owner’s title insurance in Alabama.
What You're Really Paying For
While the owner’s title insurance premium is one part of the cost of title insurance, it isn’t the only title insurance cost that’s paid at closing. Customers will also see other charges for the search and exam, the lender’s title insurance, and the closing protection letter.
These fees aren’t an attempt to gouge the customer. Instead, they cover items that are necessary to present a clear title at closing and protect that title from hidden risks in the future. All title insurance fees will be disclosed on the title commitment. You can also call your title company to get an estimate of your full title insurance costs.
Search and Exam Fee
Before the title company can issue title insurance to the lender or the owner, they must perform a search and exam. The title search involves extensive searches of public records such as mortgages, deeds, encroachments, tax liens, and other potential liens to generate an accurate abstract of title for a property. The abstract provides the legal history and chain of title for a property, often going back to the earliest public record for the property.
While the title search may sound a lot like just looking things up on the internet, it is actually a complex legal process. It’s labor intensive, and it requires skilled research. Additionally, the title search itself incurs fees from the county in order to print copies or download pages of the record. An accurate title search is essential to protect homebuyers from future risks to their title.
But the abstract generated from the title search is only the data: it must also be interpreted by an underwriter or title agent. The exam is essential for determining whether or not there are existing title issues associated with a particular property. Any number of defects can be revealed during the search and exam process and must be resolved (or cured) before closing. Both the title search and the exam are necessary to generate a title commitment and issue title insurance.
The search and exam work must be done by skilled individuals with an eye toward protecting the homebuyer’s investment. The search and exam fee covers the cost of the researcher, abstractor, and underwriters who prepare the title commitment as well as any needed curative work. All of this work is done by hand for each individual closing.
Lender's Title Insurance
It isn’t redundant to purchase two types of title insurance at closing. While both owner’s and lender’s title insurance protect against hidden risks to the title, the loan policy exclusively provides protection to the mortgage lender. Homeowners are not protected unless they purchase separate owner’s title insurance.
While title insurance is included as part of the closing costs, there are also other fees that will be due at closing. Typical closing costs include the loan origination fee, property taxes, HOA dues, and inspection fees, but buyers and sellers should have a clear picture of all closing costs prior to closing. The closer can provide a clear breakdown of these costs if you have any questions.
The Cost of Not Having Title Insurance
Ultimately, the decision to purchase owner’s title insurance is up to the individual homebuyer. It isn’t required, but it is recommended. However, even if an individual opts out of owner’s title insurance, lender’s insurance will still be required by the mortgage lender.
Title insurance provides protection for one of the largest investments a person can make, and once that premium is paid at closing, there are no other fees. Owner’s title insurance is effective for the entire time an individual owns their home, so even if a title issue arises ten or twenty years after closing, the owner is still protected and won’t have any out-of-pocket charges or attorney fees to resolve it.
Title insurance is so important because the risks are truly hidden. The title company will clear all known title issues before closing, but it’s impossible to predict what may happen in the future. Whether something’s been filed in the wrong county, a missing heir makes a claim on the home, or a buyer is the victim of fraud, these risks just cannot be fully known at closing.
Title insurance can be confusing, but at South Oak, we’re always happy to answer questions at any point in the closing process, whether a client is deciding where to purchase their title insurance or a realtor has questions a couple of hours before closing. We’re also committed to being as transparent as possible throughout the entire closing process. All charges will be disclosed in detail, and clients are welcome to ask questions about these costs at any time.
We also love working to educate realtors on the finer details of title insurance so that they can help their clients make informed decisions. We work one-on-one to answer realtor questions, or we’re also happy to come speak to your brokerage for professional development opportunities. If you'd like more information about realtor education, please contact us.