There are two types of title insurance policies. There is lender’s title insurance and owner’s title insurance.
Lender’s Title Insurance
Title insurance is required by banks and lenders to protect them against any lawsuits, claims and/or losses arising from the chain of title tied to the subject property.
This includes things like unpaid real estate taxes, liens, easements, fraud, court actions and other encumbrances, put in place by the government, contractors, previous lenders, and creditors.
As opposed to traditional insurance, title insurance is retroactive, meaning it covers issues leading up to when you purchased the property, not after.
It’s based on the loan amount, which is the lender’s investment. And it’s required because your lender actually has a huge financial stake in your property, probably more than you do if you didn’t put very much down on your home.
After all, if they’re lending 80% of the property value, they’re pretty heavily invested and will want to know that title is free of any defects.
Despite it being in their best interest, you as the borrower must pay the lender’s title insurance policy.
Refinance - A lender’s title insurance policy lasts until the loan is repaid or refinanced; you must purchase a new lender’s title insurance policy if you refinance, regardless of whether you take out the new loan with the original lender. When you refinance your home your old loan is paid off and the lender's title policy expires. Therefore when you refinance your lender will require a new loan policy on your new mortgage to protect their investment in the property.
Owner’s Title Insurance
Title insurance protects against problems affecting the title to a home, which is likely your most valuable asset. Homebuyers are protected from ownership issues by purchasing an Owner’s Policy of title insurance, which ensures that the title to their property is clear of liens or encumbrances, such as unpaid mortgages, property taxes or child support liens, to name a few. Additionally, the title company will identify anything that could limit the use of the property such as utility easements.
An owner’s title insurance policy is indefinite so long as you or your heirs have interest in the property, meaning it’s a one-time cost.
Owning a home is probably the largest financial investment a person or family will ever make. And although the owner’s title policy is optional, it is in their interest to get it to protect their asset.