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Buyers need two types of title insurance

October 19, 2007

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Q: I am purchasing my first home. My mortgage broker says I should purchase two different title-insurance policies - one for the bank and the other for me - but I think he is only trying to increase his profits by selling me "extra" insurance that I do not need. What do you think?

A: Your broker is giving you wise advice, rather than trying to fatten his profits. In fact, mortgage brokers are forbidden by law to "mark up" the title-insurance costs for their borrowers.

Your question, though, illustrates the fact that a lot of consumers still don't fully understand how title insurance works.

Title insurance essentially protects the policyholder from a loss sustained by a "defect in title." For example, if you buy a house today and someone sues next year because he has a deed to the property signed by a previous owner, the home could be taken away from you if the claim is upheld by a judge.

There are two types of title-insurance policies. The first, called "lender's title insurance," protects the bank against any future claims regarding ownership of the property. Virtually every lender requires borrowers to pay the $600 or so for such coverage, even though the policy will only reimburse the bank - not the consumer - for losses if a claim is made months or years later.

If you want the same type of protection for yourself, you'll need to pay an additional $500 or so one-time fee for a separate "owner's title insurance" policy that can reimburse you for your personal financial losses (and usually your legal fees) if a future title claim proves successful.

Though most banks require borrowers to pay for lender's title insurance before a home loan is granted, purchasing a separate owner's policy usually is an option that the borrower can either accept or reject. But considering the protection that buying an owner's policy provides - especially now that home prices still hover near all-time highs - paying a few hundred dollars for a separate owner's coverage is a wise idea.

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